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Securities Fraud: An Economic Analysis

39 Pages Posted: 20 Mar 2005  

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management

Abstract

This paper analyzes a firm's propensity to commit securities fraud and the real consequences of fraud. The theory shows that fraud has real economic cost, as investment distortions can arise from fraud-induced market misvaluation and management's ability to influence the firm's litigation risk through investment. The cost of inefficiency is borne by not only shareholders of fraudulent firms but also those of honest firms. The theory also characterizes a firm's equilibrium supply of fraud. A firm's fraud propensity and the magnitude of fraud are shown to depend on the nature of the firm's assets, growth potential, and the quality of corporate governance. The theory provides testable implications for cross-sectional variations in firms' fraud propensities and for firms' investment incentives in the presence of fraud. It also sheds light on he potential effectiveness of legislative initiatives and regulatory changes that deal with fraud.

Keywords: securities fraud, financial misreporting, corporate governance, investment

Suggested Citation

Wang, Tracy Yue, Securities Fraud: An Economic Analysis. Available at SSRN: https://ssrn.com/abstract=500562 or http://dx.doi.org/10.2139/ssrn.500562

Tracy Yue Wang (Contact Author)

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

19th Avenue South
Minneapolis, MN 55455
United States

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