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Who Blows the Whistle on Corporate Fraud?

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  • Dyck, Alexander
  • Morse, Adair
  • Zingales, Luigi

Abstract

What external control mechanisms are most effective in detecting corporate fraud? To address this question we study in depth all reported cases of corporate fraud in companies with more than 750 million dollars in assets between 1996 and 2004. We find that fraud detection does not rely on one single mechanism, but on a wide range of, often improbable, actors. Only 6% of the frauds are revealed by the SEC and 14% by the auditors. More important monitors are media (14%), industry regulators (16%), and employees (19%). Before SOX, only 35% of the cases were discovered by actors with an explicit mandate. After SOX, the performance of mandated actors improved, but still account for only slightly more than 50% of the cases. We find that monetary incentives for detection in frauds against the government influence detection without increasing frivolous suits, suggesting gains from extending such incentives to corporate fraud more generally.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6126.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6126

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Keywords: corporate finance; corporate governance;

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  1. Alexander Dyck & Natalya Volchkova & Luigi Zingales, 2004. "The Corporate Governance Role of the Media: Evidence from Russia," Working Papers w0054, Center for Economic and Financial Research (CEFIR), revised Sep 2005.
  2. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "What Works in Securities Laws?," Working Paper 19491, Harvard University OpenScholar.
  3. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  4. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
  5. Clifford Winston, 1998. "U.S. Industry Adjustment to Economic Deregulation," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 89-110, Summer.
  6. Paul M. Healy & Krishna G. Palepu, 2003. "The Fall of Enron," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 3-26, Spring.
  7. Vives,Xavier (ed.), 2006. "Corporate Governance," Cambridge Books, Cambridge University Press, number 9780521032032, April.
  8. Burns, Natasha & Kedia, Simi, 2006. "The impact of performance-based compensation on misreporting," Journal of Financial Economics, Elsevier, vol. 79(1), pages 35-67, January.
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