Everlasting Fraud

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See all articles by Vivian W. Fang

Vivian W. Fang

University of Minnesota - Twin Cities - Carlson School of Management; European Corporate Governance Institute (ECGI)

Nan Li

University of Minnesota - Twin Cities - Carlson School of Management

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Gaoqing Zhang

University of Minnesota

Date Written: October 14, 2020

Abstract

This paper models the interdependent mechanisms of corporate fraud and regulation. Our analyses yield two key insights. First, fraud is a never-ending game of cat and mouse because the strength of detection optimally matches the severity of fraud in equilibrium. Second, anti-fraud regulations can tamp down fraud pro tem by sharply decreasing the most fraudulent firms' net benefits from continuing fraud. However, concentration of regulatory resources on these firms allows other firms to be more aggressive. As such, regulations do not eradicate fraud but synchronize firms' otherwise idiosyncratic fraud decisions and lead to fraud waves. Empirical examinations of these insights provide supporting evidence. These results carry strong policy implications, offering a realistic understanding of fraud as a permanent risk in the financial markets and the limited efficacy of anti fraud regulations.

Keywords: Regulation, Financial Reporting, Accounting Fraud, Crime

Suggested Citation

Fang, Vivian W. and Li, Nan and Wang, Wenyu and Zhang, Gaoqing, Everlasting Fraud (October 14, 2020). Available at SSRN: https://ssrn.com/abstract=

Vivian W. Fang (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Nan Li

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Gaoqing Zhang

University of Minnesota ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

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