Everlasting Fraud

55 Pages Posted: 2 Mar 2021 Last revised: 23 Feb 2024

See all articles by Vivian W. Fang

Vivian W. Fang

European Corporate Governance Institute (ECGI); Indiana University

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 - Twin Cities - Department of Accounting

Date Written: February 22, 2024

Abstract

This paper proposes a new theory to explain why corporate fraud waves always resurface despite tough anti-fraud regulations. Our model offers two insights. First, the interdependent nature of fraud and regulation presents a cat-and-mouse equilibrium within-firm because detection strength optimally matches fraud severity. Second, it yields a whack-a-mole equilibrium across-firm because regulatory resources are optimally concentrated on the most fraudulent firms. Therefore, regulations cannot eradicate fraud but synchronize firms’ idiosyncratic fraud levels, contributing to waves. These results carry strong policy implications by highlighting fraud as a permanent risk in the financial markets and the limited efficacy of anti-fraud regulations.

Keywords: Regulation, Corporate Fraud, White-Collar Crime

JEL Classification: G32, G38, M40, M48

Suggested Citation

Fang, Vivian W. and Li, Nan and Wang, Wenyu and Zhang, Gaoqing, Everlasting Fraud (February 22, 2024). European Corporate Governance Institute - Law Working Paper No. 617/2021, Available at SSRN: https://ssrn.com/abstract=3762260 or http://dx.doi.org/10.2139/ssrn.3762260

Vivian W. Fang (Contact Author)

European Corporate Governance Institute (ECGI) ( email )

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

Indiana University ( email )

Bloomington, IN 47405
United States
47405 (Fax)

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 - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/gaoqing-zhang

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