Everlasting Fraud

72 Pages Posted: 2 Mar 2021 Last revised: 9 Jun 2022

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 - Twin Cities - Department of Accounting

Date Written: June 6, 2022

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 decisions, 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, Financial Reporting, Accounting Fraud, Crime

JEL Classification: G32, G34, G38, M40, M41, M48

Suggested Citation

Fang, Vivian W. and Li, Nan and Wang, Wenyu and Zhang, Gaoqing, Everlasting Fraud (June 6, 2022). 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)

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 - 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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