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Corporate Fraud and Business Conditions: Evidence from IPOs

Tracy Yue Wang · Andrew Winton · Xiaoyun Yu

356 citations0/0 files storedThe Journal of Finance

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

ABSTRACT We examine how a firm's incentive to commit fraud when going public varies with investor beliefs about industry business conditions. Fraud propensity increases with the level of investor beliefs about industry prospects but decreases when beliefs are extremely high. We find that two mechanisms are at work: monitoring by investors and short‐term executive compensation, both of which vary with investor beliefs about industry prospects. We also find that monitoring incentives of investors and underwriters differ. Our results are consistent with models of investor beliefs and corporate fraud, and suggest that regulators and auditors should be vigilant for fraud during booms.

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References

2005The economic implications of corporate financial reporting 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*1997An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud 1986Investment banking, reputation, and the underpricing of initial public offerings 1990Initial Public Offerings and Underwriter Reputation 2010Who Blows the Whistle on Corporate Fraud?2004Why Has IPO Underpricing Changed Over Time 2005Corporate Governance and Accounting Scandals

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