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Corporate Fraud and Business Conditions: Evidence from IPOs

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  • TRACY YUE WANG
  • ANDREW WINTON
  • XIAOYUN YU
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    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. Copyright (c) 2010 the American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 6 (December)
    Pages: 2255-2292

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:6:p:2255-2292

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    Cited by:
    1. Hanley, Kathleen Weiss & Hoberg, Gerard, 2012. "Litigation risk, strategic disclosure and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 103(2), pages 235-254.
    2. Tomasz Piskorski & Amit Seru & James Witkin, 2013. "Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market," NBER Working Papers 18843, National Bureau of Economic Research, Inc.

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