Fraudulent Financial Reporting and the Consequences for Employees

86 Pages Posted: 8 May 2019 Last revised: 8 Mar 2021

See all articles by Jung Ho Choi

Jung Ho Choi

Stanford University Graduate School of Business

Brandon Gipper

Stanford University Graduate School of Business

Date Written: March 7, 2021

Abstract

We combine U.S. Census data with SEC enforcement actions to examine employees’ outcomes, such as wages and turnover, before, during, and after periods of fraudulent financial reporting. We find that fraud firms’ employees lose about 50% of cumulative annual wages, compared to a matched sample, and the separation rate is much higher after fraud periods. Yet, employment growth at fraud firms is positive during fraud periods; these firms overbuild and hire new, lower-paid employees as part of the fraud, unlike firms in distress which tend to contract. When the fraud is revealed, firms shed workers, unwinding this abnormal growth and resulting in most of the negative wage consequences. Low wage employees, though unlikely to have perpetrated the fraud, experience more severe wage losses. Other sample splits show that negative wage effects are larger in thin labor markets and for fraud firms that go bankrupt.

Keywords: Wages, Employment Growth, Accounting Fraud, Information Asymmetry

JEL Classification: D83, J23, J31, M48, M51

Suggested Citation

Choi, Jung Ho and Gipper, Brandon, Fraudulent Financial Reporting and the Consequences for Employees (March 7, 2021). Stanford University Graduate School of Business Research Paper No. 19-19, Available at SSRN: https://ssrn.com/abstract=3346759 or http://dx.doi.org/10.2139/ssrn.3346759

Jung Ho Choi (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)721-8434 (Phone)

Brandon Gipper

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)498-4350 (Phone)

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