Betrayed Employees: The Impact of Financial Fraud on Inventor Productivity

Abstract

We collect detailed information of the investigations of U.S. Securities and Exchange Commission (SEC) to examine whether and how inventors are affected by financial fraud. We find that inventors’ innovation outputs, both quantitatively and qualitatively, are negatively related to the occurrence of financial fraud. 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 plays in human capital and intellectual property.

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

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