How Pervasive is Corporate Fraud?

Posted: 1 Jul 2007

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 - Haas School of Business; National Bureau of Economic Research (NBER)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 1, 2007

Abstract

After building a dataset of all corporate frauds in large corporations that impact shareholder value and are caught, we infer the unconditional probability that a fraud is committed whether or not it is subsequently caught. Our identification comes from observing situations in which the incentives for fraud detection are high. We estimate that 7% of firms commit fraud every year. We arrive at a very similar figure when we look at the increased probability of a fraud being revealed following the forced turnover of external auditors after the demise of Arthur Andersen and when we ask MBA students about the amount of fraud they have witnessed on the job. By using industry multiples, we estimate the median cost of a fraud is 40.7 percent of the pre-fraud enterprise value of the company. Hence, taking into account the overall incidence of fraud, we estimate that in publicly-traded companies with more than 750M in assets, corporate fraud costs 2.85 percent of enterprise value.

Keywords: fraud, corporate governance

JEL Classification: G3

Suggested Citation

Dyck, I.J. Alexander and Morse, Adair and Zingales, Luigi, How Pervasive is Corporate Fraud? (May 1, 2007). 2nd Annual Conference on Empirical Legal Studies Paper. Available at SSRN: https://ssrn.com/abstract=997576 or http://dx.doi.org/10.2139/ssrn.997576

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 - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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

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