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Brandeis' Policeman: Results from a Laboratory Experiment on How to Prevent Corporate Fraud

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  • Michael D. Guttentag
  • Christine L. Porath
  • Samuel N. Fraidin

Abstract

We use a laboratory experiment to study how to prevent corporate fraud. Our experiment is the first to replicate the salient features of corporate fraud in a controlled setting. We find that requiring additional disclosures significantly reduces fraud. This finding runs counter to implications from previous research, but that research does not include many of the defining aspects of corporate fraud. Our results support the federal government's continued reliance on disclosure as a way to reduce fraud, a reliance that dates back to Louis Brandeis' observation that “publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

Suggested Citation

  • Michael D. Guttentag & Christine L. Porath & Samuel N. Fraidin, 2008. "Brandeis' Policeman: Results from a Laboratory Experiment on How to Prevent Corporate Fraud," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 5(2), pages 239-273, June.
    • Handle: RePEc:wly:empleg:v:5:y:2008:i:2:p:239-273
    DOI: 10.1111/j.1740-1461.2008.00124.x
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    Cited by:

    1. Anderson, Ronald C. & Reeb, David M. & Zhang, Yuzhao & Zhao, Wanli, 2013. "The efficacy of regulatory intervention: Evidence from the distribution of informed option trading," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4337-4352.
    2. Parker Hevron, 2018. "Judicialization and Its Effects: Experiments as a Way Forward," Laws, MDPI, vol. 7(2), pages 1-21, May.

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