The Real Effects of Corporate Fraud: Evidence from Class Action Lawsuits
Accounting and Finance, Forthcoming
49 Pages Posted: 27 Jun 2014
Date Written: June 20, 2014
Using a sample of lawsuit firms from 1996 to 2009, this study examines whether fraud revelation through shareholder class action affects corporate financing and investment policies. We predict that revelation of fraud damages defendant firms’ reputation and undermines credibility of their financial disclosure. As a result, such firms experience difficulty in financing and reduce investment accordingly. Consistent with our prediction, we find that fraud-committing firms experience a decline in total financing (total investment) by 1.5% (0.8%) of total assets after fraud revelation. Difference-in-differences analyses reinforce our main findings. The impact is more pronounced for firms with lower inherent fraud incidence.
Keywords: Corporate fraud, Class action lawsuit, Information asymmetry, Financing, Investment
JEL Classification: M40, G32
Suggested Citation: Suggested Citation