Financial Fraud and Inventor Productivity

Abstract

Given the profound effects of financial fraud on corporate operations and managerial behaviors, this paper investigates the relation between financial fraud and inventor productivity. We find that the occurrence of financial fraud is negatively related to inventors’ innovation outputs, both quantitatively and qualitatively. Moreover, further tests suggest that such a relation is more pronounced when financial information is more distorted, when more non-top-management employees are involved, when fraud is driven by top executives’ self-serving motivation, when shareholders care more about short-term performance, or when inventors have lower levels of trust in their respective firms. Our results hold when we implement an instrumental variable regression based on the SEC’s past enforcement activities. In conclusion, our evidence highlights the important role that financial fraud in human capital and intellectual property.

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

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