Corporate Fraud and Real Investment

40 Pages Posted: 22 Mar 2006 Last revised: 11 Mar 2008

See all articles by Oguzhan Ozbas

Oguzhan Ozbas

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: February 2008

Abstract

This paper studies the real investment and financing behavior of firms around the period of fraud identified in SEC Accounting and Auditing Enforcement Releases. In the pre-fraud period, the typical fraudulent firm has a higher valuation, invests more and exhibits higher Q-sensitivity of investment than industry peers. The fraud period, by contrast, is characterized by significant drops in valuation and investment. I find no support for the hypothesis that fraudulent firms waste real resources by overinvesting during periods of fraud to signal value. Fraud appears to be an attempt to cover up bad investments made in response to the market's high valuation in the pre-fraud period.

Suggested Citation

Ozbas, Oguzhan, Corporate Fraud and Real Investment (February 2008). Available at SSRN: https://ssrn.com/abstract=891450 or http://dx.doi.org/10.2139/ssrn.891450

Oguzhan Ozbas (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-0781 (Phone)
213-740-6650 (Fax)

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