How Pervasive is Corporate Fraud?

35 Pages Posted: 2 Oct 2023

See all articles by I. J. Alexander Dyck

I. J. Alexander Dyck

University of Toronto - Rotman School of Management

Adair Morse

University of California, Berkeley

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2023

Abstract

We provide a lower-bound estimate of the undetected share of corporate fraud. To identify the hidden part of the “iceberg,” we exploit Arthur Andersen’s demise, which triggered added scrutiny on Arthur Andersen’s former clients and thereby increased the detection likelihood of preexisting frauds. Our evidence suggests that in normal times only one-third of corporate frauds are detected. We estimate that on average 10% of large publicly traded firms are committing securities fraud every year, with a 95% confidence interval of 7%-14%. Combining fraud pervasiveness with existing estimates of the costs of detected and undetected fraud, we estimate that corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021.

Keywords: Corporate governance · Corporate fraud · Detection likelihood · Cost– benefit analysis · Securities regulation · Arthur Andersen

Suggested Citation

Dyck, I.J. Alexander and Morse, Adair and Zingales, Luigi, How Pervasive is Corporate Fraud? (January 2023). George J. Stigler Center for the Study of the Economy & the State Working Paper No. 327, Available at SSRN: https://ssrn.com/abstract=4590097 or http://dx.doi.org/10.2139/ssrn.4590097

I.J. Alexander Dyck (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S 3E6
Canada
416-946-0819 (Phone)

Adair Morse

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Luigi Zingales

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
548
Abstract Views
6,147
Rank
3,350
PlumX Metrics