Financial Reporting Fraud and Delegated Investment

60 Pages Posted: 26 Feb 2021

See all articles by Robert H. Davidson

Robert H. Davidson

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems

Christo A. Pirinsky

University of Central Florida

Hanjiang Zhang

Washington State University - Carson College of Business

Date Written: January 9, 2021

Abstract

Following the public revelation of financial reporting fraud against a company in their portfolio, professional money managers decrease (increase) their holdings in stocks with high (low) expected financial reporting fraud risk, reduce the total risk level of their funds, and allocate their portfolios closer to their respective benchmarks. Portfolio managers exposed to financial reporting fraud rely less on accounting information in their trading decisions subsequently, suggesting that fraud alters the behavior of investment managers by reducing their trust in security issuers. The results provide insight into the implications of fraud for professional investment decisions.

Keywords: financial reporting fraud, trust, mutual funds, trading behavior

JEL Classification: G14, G40, K42

Suggested Citation

Davidson, Robert H. and Pirinsky, Christo Angelov and Zhang, Hanjiang, Financial Reporting Fraud and Delegated Investment (January 9, 2021). Available at SSRN: https://ssrn.com/abstract=3763194 or http://dx.doi.org/10.2139/ssrn.3763194

Robert H. Davidson

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Christo Angelov Pirinsky

University of Central Florida ( email )

College of Business Administration/Finance
PO Box 161400
Orlando, FL FL 32816
United States
407-823-5962 (Phone)

Hanjiang Zhang (Contact Author)

Washington State University - Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

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