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Forensic Finance

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  • Jay R. Ritter

Abstract

During popular prime-time television shows, forensic investigators use specialized but wide-ranging scientific knowledge of chemical trace evidence, bacteria, DNA, teeth, insects, and other specialties to collect and sift evidence of possible crimes. In economics and finance, forensic investigators apply their own specialized knowledge of prices, quantities, timing, and market institutions -- and sometimes discover or substantiate evidence that is used by regulatory or criminal enforcement agencies. In this article, I will discuss four recent topics in forensic finance, all of which have attracted media attention: 1) the late trading of mutual funds, 2) stock option backdating, 3) the allocation of underpriced initial public offerings to corporate executives, and 4) changes in the records of stock analyst recommendations. In most of these cases, once certain practices or patterns have been publicized, financial industry practice has changed.

Suggested Citation

  • Jay R. Ritter, 2008. "Forensic Finance," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 127-147, Summer.
    • Handle: RePEc:aea:jecper:v:22:y:2008:i:3:p:127-47
    Note: DOI: 10.1257/jep.22.3.127
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.22.3.127
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    References listed on IDEAS

    as
    1. Goetzmann, William N. & Ivković, Zoran & Rouwenhorst, K. Geert, 2001. "Day Trading International Mutual Funds: Evidence and Policy Solutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(3), pages 287-309, September.
    2. Yermack, David, 1997. "Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-476, June.
    3. Eric Zitzewitz, 2006. "How Widespread Was Late Trading in Mutual Funds?," American Economic Review, American Economic Association, vol. 96(2), pages 284-289, May.
    4. Eric Zitzewitz, 2003. "Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(2), pages 245-280, October.
    5. Alexander Ljungqvist & Christopher Malloy & Felicia Marston, 2009. "Rewriting History," Journal of Finance, American Finance Association, vol. 64(4), pages 1935-1960, August.
    6. Zitzewitz Eric W, 2009. "Prosecutorial Discretion in Mutual Fund Settlement Negotiations, 2003-7," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-42, June.
    7. Rahul Bhargava & Ann Bose & David A. Dubofsky, 1998. "Exploiting International Stock Market Correlations with Open-end International Mutual Funds," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(5&6), pages 765-773.
    8. William G. Christie & Paul H. Schultz, 1995. "Policy Watch: Did Nasdaq Market Makers Implicitly Collude?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 199-208, Summer.
    9. Heron, Randall A. & Lie, Erik, 2007. "Does backdating explain the stock price pattern around executive stock option grants?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 271-295, February.
    10. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Generalized fraud on Wall Street
      by Economic Logician in Economic Logic on 2008-10-20 18:38:00

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    Cited by:

    1. Andreoli-Versbach, Patrick & Franck, Jens-Uwe, 2013. "Actions Speak Louder than Words: Econometric Evidence to Target Tacit Collusion in Oligopolistic Markets," Discussion Papers in Economics 16179, University of Munich, Department of Economics.
    2. Paul A. Griffin & David H. Lont & Kate McClune, 2014. "Insightful Insiders? Insider Trading and Stock Return around Debt Covenant Violation Disclosures," Abacus, Accounting Foundation, University of Sydney, vol. 50(2), pages 117-145, June.
    3. Henk Berkman & Michael McKenzie & Patrick Verwijmeren, 2013. "Hole in the Wall: Informed Short Selling ahead of Private Placements," Tinbergen Institute Discussion Papers 13-153/IV/DSF62, Tinbergen Institute.
    4. Lin William Cong & Xi Li & Ke Tang & Yang Yang, 2021. "Crypto Wash Trading," Papers 2108.10984, arXiv.org.
    5. Officer, Micah S. & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Club deals in leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 98(2), pages 214-240, November.
    6. Alan D. Jagolinzer & David F. Larcker & Gaizka Ormazabal & Daniel J. Taylor, 2020. "Political Connections and the Informativeness of Insider Trades," Journal of Finance, American Finance Association, vol. 75(4), pages 1833-1876, August.
    7. Luigi Zingales, 2015. "Does Finance Benefit Society?," NBER Working Papers 20894, National Bureau of Economic Research, Inc.
    8. Cai, Yu & Wang, Qing, 2022. "Money funds manage returns," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    9. Goergen, Marc & Renneboog, Luc, 2011. "Managerial compensation," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1068-1077, September.
    10. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional stock trading on loan market information," Journal of Financial Economics, Elsevier, vol. 100(2), pages 284-303, May.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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