Product Differentiation, Benchmarking, and Corporate Fraud
50 Pages Posted: 16 Nov 2017 Last revised: 26 Apr 2018
Date Written: April 17, 2018
We find that firms with less product market differentiation exhibit significantly lower rates of fraudulent activity. This relationship is more pronounced for complex firms and is robust to controlling for various measures of competition and industry heterogeneity. Exploiting IPOs by product-market rivals as a shock to a firm’s information environment, we find that more publicly available information from comparable firms facilitates the detection of fraud. Moreover, this effect is stronger for firms with ex ante less similar public rivals. These findings suggest that greater product market overlap with rivals disciplines firms by providing benchmarks for auditors, regulators, and investors.
Keywords: corporate fraud, product markets, benchmarking, competition
JEL Classification: G30
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