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Indiana University Bloomington

Department of Finance

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Research and Publications

Journal Articles

Corporate Fraud and Business Conditions: Evidence from IPOs

2010, Journal of Finance

Tracy Wang, Andrew Winton, Xiaoyun Yu

Abstract

We examine how a firm’s incentive to commit fraud when going public varies with investor beliefs about industry business conditions. Fraud propensity increases with the level of investor beliefs about industry prospects but decreases in the presence of extremely high beliefs. Evidence suggests that two mechanisms are at work: monitoring by investors, and short-term executive compensation, both of which vary with investor beliefs about industry prospects. We also find evidence that monitoring incentives of investors and underwriters differ. Our results are consistent with the predictions of recent models of investor beliefs and corporate fraud, and suggest that regulators and auditors should be especially vigilant for fraud during booms.

Citation

Wang, Tracy, Andrew Winton, and Xiaoyun Yu (2010), “Corporate Fraud and Business Conditions: Evidence from IPOs,” Journal of Finance, Vol. 65, No. 6, December, pp. 2255-2292.