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The real effects of corporate fraud: evidence from class action lawsuits
Author(s) -
Yuan Qingbo,
Zhang Yunyan
Publication year - 2016
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12090
Subject(s) - class action , lawsuit , damages , reputation , credibility , business , revelation , securities fraud , investment (military) , shareholder , accounting , finance , action (physics) , corporate governance , law , art , state (computer science) , physics , literature , supreme court , algorithm , quantum mechanics , politics , computer science , political science
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 per cent (0.8 per cent) 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.