Booms, Busts, and Fraud

Povel, Paul; Singh, Rajdeep; Winton, Andrew

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Booms, Busts, and Fraud

Review of Financial Studies, Forthcoming

43 Pages Posted: 11 Jan 2007

See all articles by Paul Povel

Paul Povel

University of Houston - Department of Finance, C.T. Bauer College of Business

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

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Abstract

Firms sometimes commit fraud by altering publicly reported information to be more favorable, and investors can monitor firms to obtain more accurate information. We study equilibrium fraud and monitoring decisions. Fraud is most likely to occur in relatively good times, and the link between fraud and good times becomes stronger as monitoring costs decrease. Nevertheless, improving business conditions may sometimes diminish fraud. We provide an explanation for why fraud peaks towards the end of a boom and is then revealed in the ensuing bust. We also show that fraud can increase if firms make more information available to the public.

Keywords: Boom, Credit Cycle, Fraud, Monitoring

JEL Classification: E32, G3, G38

Suggested Citation: Suggested Citation

Povel, Paul and Singh, Rajdeep and Winton, Andrew, Booms, Busts, and Fraud. Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=956209