Product Differentiation, Benchmarking, and Corporate Fraud
60 Pages Posted: 17 Jun 2019
Date Written: June 6, 2019
We find that product market differentiation is an economically meaningful and robust predictor of accounting fraud. Controlling for traditional measures of competition and large tariff reductions does not influence this finding. Thus, product differentiation appears to capture a unique relation between competition and fraud, which we posit is driven by the firm's external information environment. To help establish identification, we exploit product similarities with rivals issuing IPOs, as well as cross-sectional variation in firm complexity, institutional ownership, analyst coverage, and financial statement comparability. Our analysis suggests that lower product differentiation enhances external monitoring, which disciplines manager reporting behavior.
Keywords: corporate fraud, product markets, benchmarking, competition
JEL Classification: G30
Suggested Citation: Suggested Citation