The Impact of Financial Fraud on Technological Innovation: Myopia, Job Security, and Loss of Trust

59 Pages Posted: 22 Apr 2020 Last revised: 21 Jul 2021

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

Feng Tian

Hong Kong Polytechnic University

Long Yi

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Date Written: July 21, 2020

Abstract

Given the profound effects of financial fraud on corporate managers, inventors, and cultures, this paper investigates how financial fraud influences technological innovation at both firm and inventor levels. We find that the occurrence of financial fraud is negatively related to firms’ and inventors’ innovation outputs, both quantitatively and qualitatively. This finding is attributed to the negative impact of fraud on individual inventors’ productivity and the number of inventors deployed. Moreover, cross-sectional tests suggest that such impact is more pronounced when top-level management’s tone is more myopic, when fraud is more observable to employees, or when trust between inventors and firms is lacking. Our results hold when we implement an instrumental variable regression based on the SEC’s past enforcement activities and when we include various controls that reflect alternative explanations. In conclusion, our study implies that financial fraud not only hurts shareholders but also damages valuable human capital and results in “brain drain”. 

Keywords: Financial Fraud; Innovation; Managerial Myopia; Trust; Corporate Culture

JEL Classification: G30; M40; M41; M43; O31

Suggested Citation

Hsu, Po-Hsuan and Tian, Feng and Yi, Long, The Impact of Financial Fraud on Technological Innovation: Myopia, Job Security, and Loss of Trust (July 21, 2020). Available at SSRN: https://ssrn.com/abstract=3562829 or http://dx.doi.org/10.2139/ssrn.3562829

Po-Hsuan Hsu (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

Feng Tian

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Long Yi

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Hong Kong

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