Deterrence Effect and Opportunistic Corporate Fraud
52 Pages Posted: 12 Jan 2021 Last revised: 1 Dec 2022
Date Written: November 30, 2022
I quantify the deterrence effect of SEC regulatory intervention. Using unique data, I estimate a model that captures regulatory deterrence by firms' adjustments of fraud propensities in response to their expectations of regulators' enforcement actions, and find that 10 to 58 additional firms commit fraud each year with a one standard deviation change in the main forms of SEC regulatory intervention. To aid model identification, I exploit exogenous variation in regulatory attention from the 2005 option backdating scandal and find further support for the deterrence effect of enforcement. The findings are robust to various alternative stories.
Keywords: deterrence, enforcement, fraud, SEC, detection-controlled estimation
JEL Classification: G38, K42, M48, C35
Suggested Citation: Suggested Citation