Booms, Busts, and Fraud
AbstractWe examine firm managers' incentives to commit fraud in a model where firms seek funding from investors and investors can monitor firms at a cost in order to get more precise information about firm prospects. We show that fraud incentives are highest when business conditions are good, but not too good: in exceptionally good times, even weaker firms can get funded without committing fraud, whereas in bad times investors are more vigilant and it is harder to commit fraud successfully. As investors' monitoring costs decrease, the region in which fraud occurs shifts towards better business conditions. It follows that if business conditions are sufficiently strong, a decrease in monitoring costs actually increases the prevalence of fraud. If investors can only observe current business conditions with noise, then the incidence of fraud will be highest when investors begin with positive expectations that are disappointed ex post. Finally, increased disclosure requirements can exacerbate fraud. Our results shed light on the incidence of fraud across the business cycle and across different sectors.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0312007.
Date of creation: 11 Dec 2003
Date of revision:
Note: Type of Document - pdf; prepared on WinXP; to print on any;
Contact details of provider:
Web page: http://22.214.171.124
Boom; Credit Cycle; Fraud; Monitoring;
Other versions of this item:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G3 - Financial Economics - - Corporate Finance and Governance
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-12-14 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Persons, John C & Warther, Vincent A, 1997. "Boom and Bust Patterns in the Adoption of Financial Innovations," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 939-67.
- Shivdasani, Anil & Song, Wei-Ling, 2010. "Breaking Down the Barriers: Competition, Syndicate Structure, and Underwriting Incentives," Working Papers 10-25, University of Pennsylvania, Wharton School, Weiss Center.
- Nakamura, L.I. & Roszbach, K., 2010.
"Credit Ratings and Bank Monitoring Ability,"
2010-37S, Tilburg University, Center for Economic Research.
- Leonard I. Nakamura & Kasper Roszbach., 2013. "Credit ratings and bank monitoring ability," Working Papers 13-21, Federal Reserve Bank of Philadelphia.
- Leonard I. Nakamura & Kasper Roszbach., 2010. "Credit ratings and bank monitoring ability," Working Papers 10-21, Federal Reserve Bank of Philadelphia.
- Chi, Jianxin (Daniel) & Gupta, Manu, 2009. "Overvaluation and earnings management," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1652-1663, September.
- Agliardi, Elettra & Andergassen, Rainer, 2009.
"Last resort gambles, risky debt and liquidation policy,"
Review of Financial Economics,
Elsevier, vol. 18(3), pages 142-155, August.
- E. Agliardi & R. Andergassen, 2006. "Last Resort Gambles, Risky Debt and Liquidation Policy," Working Papers 577, Dipartimento Scienze Economiche, Universita' di Bologna.
- Elettra Agliardi & Rainer Andergassen, 2007. "Last Resort Gambles, Risky Debt and Liquidation Policy," Working Paper Series 31-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
- Immordino, Giovanni & Pagano, Marco, 2008.
"Corporate Fraud, Governance and Auditing,"
CEPR Discussion Papers
7104, C.E.P.R. Discussion Papers.
- Giovanni Immordino & Marco Pagano, 2008. "Corporate Fraud, Governance and Auditing," CSEF Working Papers 203, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 26 Apr 2012.
- Marco Pagano & Giovanni Immordino, 2009. "Corporate Fraud, Governance and Auditing," EIEF Working Papers Series 0909, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2009.
- Gong, Jiong & McAfee, R. Preston & Williams, Michael, 2011.
28934, University Library of Munich, Germany.
- Lennox, Clive & Li, Bing, 2014. "Accounting misstatements following lawsuits against auditors," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 58-75.
- Friebel, Guido & Guriev, Sergei, 2005.
"Earnings Manipulation and Incentives in Firms,"
CEPR Discussion Papers
4850, C.E.P.R. Discussion Papers.
- Guido Friebel & Sergei Guriev, 2004. "Earnings Manipilation and Incentives in Firms," Working Papers w0055, Center for Economic and Financial Research (CEFIR), revised Oct 2005.
- Friebel, Guido & Guriev, Sergei, 2005. "Earnings Manipulation and Incentives in Firms," CEPR Discussion Papers 4861, C.E.P.R. Discussion Papers.
- Shivdasani, Anil & Song, Wei-Ling, 2011. "Breaking down the barriers: Competition, syndicate structure, and underwriting incentives," Journal of Financial Economics, Elsevier, vol. 99(3), pages 581-600, March.
- Beatty, Anne & Liao, Scott & Yu, Jeff Jiewei, 2013. "The spillover effect of fraudulent financial reporting on peer firms' investments," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 183-205.
- Chernobai, Anna & Yasuda, Yukihiro, 2013. "Disclosures of material weaknesses by Japanese firms after the passage of the 2006 Financial Instruments and Exchange Law," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1524-1542.
- Bar-Isaac, Heski & Shapiro, Joel, 2013.
"Ratings quality over the business cycle,"
Journal of Financial Economics,
Elsevier, vol. 108(1), pages 62-78.
- 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.
- Goldman, Eitan & Slezak, Steve L., 2006. "An equilibrium model of incentive contracts in the presence of information manipulation," Journal of Financial Economics, Elsevier, vol. 80(3), pages 603-626, June.
- Cope, Eric W. & Piche, Mark T. & Walter, John S., 2012. "Macroenvironmental determinants of operational loss severity," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1362-1380.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.