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Who Blows the Whistle on Corporate Fraud?

  • Alexander Dyck
  • Adair Morse
  • Luigi Zingales

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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File URL: http://www.nber.org/papers/w12882.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12882.

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Date of creation: Feb 2007
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Publication status: published as Dyck, Alexander, Adair Morse, and Luigi Zingales. "Who Blows the Whistle on Corporate Fraud?" The Journal of Finance 65, 6 (2010): 2213-2253.
Handle: RePEc:nbr:nberwo:12882
Note: CF
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  2. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2003. "What Works in Securities Law?," NBER Working Papers 9882, National Bureau of Economic Research, Inc.
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  4. repec:cup:cbooks:9780521032032 is not listed on IDEAS
  5. 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.
  6. Dyck, Alexander & Volchkova, Natalya & Zingales, Luigi, 2007. "The Corporate Governance Role of the Media: Evidence from Russia," Working Papers 07-1, University of Pennsylvania, Wharton School, Weiss Center.
  7. 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.
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