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The Market's Valuation of Fraudulently Reported Earnings

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  • Kai Wai Hui
  • Clive Lennox
  • Guochang Zhang

Abstract

This study examines the market valuation of accounting earnings during the period before it is publicly revealed that the earnings are fraudulent. Using both cross-sectional and time-series valuation models, we first find that the market accords less weight to earnings when the accounting numbers are fraudulent. We also show that the market better anticipates the presence of fraud when there is information in the public domain indicating a high ex-ante risk of fraud. Our findings suggest that investors are able to accurately assess the probability of fraud and that such assessments affect the market's valuation of earnings even before it is publicly announced that fraud has occurred.

Suggested Citation

  • Kai Wai Hui & Clive Lennox & Guochang Zhang, 2014. "The Market's Valuation of Fraudulently Reported Earnings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 627-651, June.
    • Handle: RePEc:bla:jbfnac:v:41:y:2014:i:5-6:p:627-651
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    File URL: http://hdl.handle.net/10.1111/jbfa.12072
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    References listed on IDEAS

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    2. Lin, Hsien-Ping & Walker, M. Mark & Wang, Yung-Jang, 2020. "Shareholder wealth effects of corporate fraud: Evidence from Taiwan’s securities investor and futures trader protection act," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 222-243.
    3. So-Jin Yu & Jin-Sung Rha, 2021. "Research Trends in Accounting Fraud Using Network Analysis," Sustainability, MDPI, vol. 13(10), pages 1-26, May.

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