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TRACY YUE WANG, Search for more papers by this author. ANDREW WINTON, Search for more papers by this author. XIAOYUN YU, Wang and Winton are at the Carlson School of Management, University of Minnesota. Yu is at the Kelley School of Business, Indiana University and the Shanghai Advanced Institute of Finance, Shanghai Jiaotong University.
Tracy Yue Wang Carlson School of Management University of Minnesota 321 19th Avenue South Minneapolis, MN 55455 [email protected] Michael S. Weisbach Department of Finance Fisher College of Business Ohio State University 2100 Neil Ave. Columbus, OH 43210 and NBER [email protected]
Download. Securities fraud: An economic analysis. Tracy Yue Wang. ABSTRACT Title of dissertation: Securities Fraud: An Economic Analysis Yue Wang, Doctor of Philosophy, 2005 Dissertation directed by: Professor Lemma Senbet, Professor Nagpurnanand Prabhala Department of Finance This thesis develops an economic analysis of securities fraud.Estimated Reading Time: 16 mins
May 23, 2013 · Tracy Yue Wang. University of Minnesota - Twin Cities - Carlson School of Management. There are 2 versions of this paper. Corporate Financial Distress and Bankruptcy: A Survey. Foundations and Trends in Finance, Vol. 5, No. 4 (2010) 243-335. Number of pages: 81 Posted: 05 Apr 2012 Last Revised: 11 Jan 2013. Downloads 1,355.Cited by: 11
Tracy Yue Wang, University of Minnesota, Finance Department, Faculty Member. Studies Finance, Forward Premium Puzzle, and Corporate Governance.
Tracy Yue Wang. University of Minnesota. Verified email at umn.edu - Homepage. Corporate governance securities fraud behavioral finance. Articles Cited by Public access Co-authors. Title. Sort. Sort by citations Sort by year Sort by title. Cited by. Cited by. Year; Why do firms go dark? Causes and economic consequences of voluntary SEC ...
Tracy Yue Wang Professor Finance Contact. 612-624-5869 3-271 Carlson School [email protected] Curriculum Vitae View Personal Website. Education: PhD 2005 Finance Robert H. Smith School of Business, University of Maryland MA 2000 ...
Apr 15, 2019 · Tracy Yue Wang. University of Minnesota - Twin Cities - Carlson School of Management. There are 2 versions of this paper Public Attention to Gender Equality and Board Gender Diversity. European Corporate Governance Institute – Finance Working Paper No. 667/2020Cited by: 4
Tracy Yue Wang 3-271 Carlson School of Management , 321-19 th Avenue South, Minneapolis MN 55455 Tel: 612 624 5869. Fax: 612 626 1335. Email: [email protected] umn.edu . E DUCATION Robert H. Smith School of Business, University of Maryland, College Park. 2005 . Ph.D., Finance . Ohio State University 2000 M.A., Economics Renmin University of China 1998
It arises solely from the effect of asymmetric information about the invest- ment return, as shown in Myers and Majluf That is, the filing of lawsuits on one firm significantly negatively affects the stock performances of other firms in the same industry. Overall, results in Table 5 imply that rapidly growing firms with insufficient internal capital are likely to misreport their financial performance, because fraud enables them to exercise their growth options on favorable terms. The earnings management literature has provided evidence that managers tend to overreport earnings prior to major external financing activities such as public equity offerings see, e. Jensen also provides some good examples of bad investments and value destruction in fraudulent firms such as Nortel Networks and eToy. Specifically, fraudulent firms tend to be those who have good growth prospects and large external financing needs, but experience negative prof- itability shocks. Table 2 at the end of the paper lists the corporate events or entities that precipitated the federal private securities class action lawsuits filed in and in the United States. Second, incumbent shareholders may attempt to alter the perceptions of prospective investors through managed earnings, which creates the external demand for earnings management. The reason is that increased disclosure could give the market an illusion of increased transparency, which could actually decrease market vigilance. Growth 0. Unfollow Follow Unblock. Effective monitoring should increase the probability of uncovering fraudulent corporate activities and discourage fraud ex ante. I also examine Arthur Andersen separately, and find no significant result. Inefficient investment is one example. Risky investment e. First, technology firms are disproportionately more involved in accounting-related se- curities litigation. I am also extremely grateful to Professor Jeffrey Smith for his kind help and insightful comments on my empirical essay. This thesis develops an economic framework to characterize the determinants and conse- quences of securities fraud. For example, this paper shows that large institutional ownership is associated with high probability of fraud detection and low probability of fraud. Therefore, unexpected bad performance unexpected by the market after the commencement of fraud will increase the probability of fraud detection. I introduce a new empirical methodology to analyze fraud. The previous section discusses some potential determinants of the detection risk. In essence, I model the probability of detected fraud what we observe as the product of two latent probabilities: the probability of committing fraud and the probability of detecting fraud conditional on fraud occurrence. Chapter 3 reviews the related literature. These results, together with the evidence of overinvestment in Panel B of Table 4, imply that fraud can be associated with investment distortions and thus real economic costs. Time 0: Institutional Arrangements At time 0, the institutional arrangement of the firm is established. When insider equity incentive is small, increasing equity incentive can have the unintended effect of increasing the probability of fraud. More specifically, I address the following research questions: 1. This implies that insider equity incentive can be a double-edged sword when it is used to align managerial and shareholder interests in dispersely-owned firms. The manager privately observes the gross return to the new project as r. This may lead us to draw incorrect inferences. Recall that x is the probability that the manager will undertake a newly arrived investment project at time 2. The market value of the firm is the expected discounted value of future cash flows. A number of studies have examined different incentives for earnings manage- ment, including capital market needs, contracts written on accounting numbers and government regulations see Healy and Wahlen for a review of empirical work on earnings management. Capital expenditures tend to be more straightforward. Causes and economic consequences of voluntary SEC deregistrations more. The reason is that auditor opinions do not exhibit much variation at all. Finally, Chapter 6 concludes. However, the true value of the acquired assets and the synergy between the acquired and the existing assets may not be correctly understood by the market or even the acquirer. In each earnings interval, y e equals the upper bound of that interval. Following the literature, I use board size and the percentage of outside directors to proxy for board independence. The movement was so fast that 9 months after the Enron debacle, President Bush signed the Sarbanes-Oxley bill into law. I would like to thank Professor Vojislav Maksimovic for all the inspiring discussions we had during my time in the PhD program. However, the univariate comparisons do not control for factors that may influence the size of investment. What type of corporate monitor has been effective in discovering corporate fraudulent activities?
To browse Academia. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Securities fraud: An economic analysis Unpublished working paper. University of Minnesota, Tracy Yue Wang. A short summary of this paper. Securities fraud: An economic analysis. The thesis consists of a theory essay and an empirical essay. I show that fraud can lead to investment distortions. The theory also characterizes the equilibrium supply of fraud. In the empirical essay, I test my main model predictions, using a new hand-compiled fraud data set. I use econometric methods to account for the unobservability of undetected frauds, and disentangle the effects of cross-sectional variables into their effect on the probability of committing fraud and the effect on the probability of detecting fraud. I find that the level, type, and financing of investment all matter in determining the probability of fraud and the likelihood of detection. I also examine the monitoring roles of large shareholders, institutional owners, independent auditors, and corporate boards. I find that large block or institutional holdings tend to discourage fraud by increasing the detection likelihood. The roles of independent auditors and corporate board are weaker. It has been great pleasure of mine to work with and learn from these extraordinary individuals. I would like to thank Professor Vojislav Maksimovic for all the inspiring discussions we had during my time in the PhD program. I am also extremely grateful to Professor Jeffrey Smith for his kind help and insightful comments on my empirical essay. I thank Professor Nengjiu Ju for agreeing to serve on my thesis committee and sparing time to review my manuscript. I also owe my gratitude to all the other faculty members in the Finance Department. I would not have been able to reach this far without their kind encouragement and helpful advice. I wish to convey my special thanks to Professor Alexander Triantis, who has been a great mentor and a wonderful friend during the past two years. I owe my deepest thanks to my family - my mother and father who have always stood by me and guided me through my career, and have pulled me through against impossible odds at times. Lastly, thank you all and thank God! The magnitude of the alleged securities fraud is stunning. The movement was so fast that 9 months after the Enron debacle, President Bush signed the Sarbanes-Oxley bill into law. Securities fraud is a very serious issue. It undermines a core value in capital markets, the integrity of public companies, which is essential to investor confidence in those markets and the efficient allocation of capital. Furthermore, we also observe inefficient investments and serious value destructions in many fraudulent firms e. The governance crisis and the on-going governance reform call for careful economic reflections on what have happened, because the ex- act nature, significance, and consequences of securities fraud and the economics underlying the legislative and regulatory changes are still incompletely understood. This thesis develops an economic framework to characterize the determinants and conse- quences of securities fraud. I define securities fraud as deliberate and material misrepresentation of corporate performance, and thus use fraud and misreporting interchangeably. The thesis consists of a theoretical model of fraud and empirical analysis. Different firms have different propensities to commit fraud because they face different cost-benefit tradeoffs. In this paper, the benefit from fraud is that financial misreporting can create or sustain short-term market overvaluation of the firm. The cost of fraud is litigation risk. With some positive probability, fraudulent activities will be uncovered, resulting in a fraud penalty which includes both explicit monetary fines and other implicit costs, such as loss of reputation. First, financial misreporting can affect the short-term market valuation of the firm and allow the firm to invest using cheap outside capital. Second, after committing fraud, the firm has incentive to cover things up. Such incentive can motivate the firm to strategically use investment to mask fraud and reduce its litigation risk. The model predicts that fraudulent firms tend to overinvest in the sense that they would undertake some negative NPV projects that destroy shareholder value. In particular, fraud can induce a preference for risky in terms of high return volatility or uncorrelated projects uncorrelated with the cash flow from existing assets , because these types of investment can better disguise fraud than others. The investment distortion can lead to serious value destructions in the firm, which is the real economic cost of fraud. Furthermore, the cost of inefficiency is borne by not only shareholders of fraudulent firms but also those of honest firms, because ex ante the market cannot perfectly distinguish between the two types of firms. The model shows that the firm will honestly reveal performance if its performance is very good or if it is desperately bad. The former case is associated with low benefit from fraud, and the latter is associated with high litigation risk. The model predicts that fraudulent firms tend to have high growth potential but experience negative profitability shocks. The theory also generates implications about the role of corporate governance in the context of corporate fraud. The model shows that good corporate governance can increase the likelihood of fraud detection and thus deter fraud ex ante. However, corporate governance may also fail to prevent fraud if it is just about aligning the interest of the management with that of incumbent shareholders.
This implies that these industries tend to have either large benefit from fraud, or high detection risk, or both. However, steep equity incentive scheme may not solve the problem, because it can induce insiders to misreport rather than to work harder for the interest of outside shareholders. Log In Sign Up. Probability of Fraud Detection This model considers two fraud detection mechanisms: detection through cash flow and detection through internal corporate governance. Second, after committing fraud, the firm has incentive to cover things up. I would not have been able to reach this far without their kind encouragement and helpful advice. The economics of corporate misreporting is examined in the accounting disclosure literature. Growth 0. If the market values good corporate governance but it is very costly to build up the quality, then the firm may still lean towards a low p. Proposition 3 If the firm can boost its market value by overstating its earnings, then the firm has an incentive to overinvest. Corporate Monitoring Effective monitoring over the management should increase the likelihood of fraud detection and deter fraud ex ante. It is possible that managers may intentionally understate earnings e. The cost-benefit tradeoff leads to the following maximization problem for the manager at time 1. Most existing studies on corporate fraud have focused on the benefit side of the tradeoff. According to Securities Class Action Clearinghouse SCAC estab- lished by the Stanford Law School, a securities class action is a case brought pursuant to Federal Rule of Civil Procedure 23 on behalf of a group of persons who purchased the securities of a particular company during a specified period of time the class period. The previous section discusses some potential determinants of the detection risk. A class period generally ends at the time of some major events that precipitate the litigation. With some positive probability, fraudulent activities will be uncovered, resulting in a fraud penalty which includes both explicit monetary fines and other implicit costs, such as loss of reputation. The model predicts that fraudulent firms tend to have high growth potential but experience negative profitability shocks. Disentangling fraud commitment and fraud detection provides two advantages. Chapter 4 develops an analytical model to characterize the economic determinants of corporate fraud propensity and the real consequences of fraud. I use net income because the restated information on this variable is more complete than the one on other accounting measures such as income before extraordinary items and operating income. Class Period days Age years Stock Exchange of obs. There is also indirect evidence that fraudulent firms generally experience negative profitability shocks in the year when fraud begin. Therefore, in order to better illustrate the differences between the straight probit and the bivarate probit models, I randomly choose one year for every comparison firm. The former case is associated with low benefit from fraud, and the latter is associated with high litigation risk. The inconsistency leads to the discovery of fraud. Second, very good economic conditions may not continue. These distortions emerge in all three panels. A penalty determines the makes a disclosure decision generates gross return R. The model predicts that the type of investment that produces the most valuation imprecision will have the strongest effect on detection likelihood. I find that large block or institutional holdings tend to discourage fraud by increasing the detection likelihood. Therefore, the information provided in this section is based on the identifiable filings. Dechow, Sloan and Sweeney find that firms committing financial statement fraud are likely to have a board dominated by insiders and have a CEO who is also the chairman of the board or the founder of the company. There has been quite some empirical evidence on the role of large shareholders in corporate governance see a recent survey by Holderness Enter the email address you signed up with and we'll email you a reset link. Illegal insider trading. This category of fraud refers to the unfair dealings in investment banking activities. Second, different types of investment appear to have differential effects on the probability of fraud detection. Among the different types of assets, accounts receivable and inventory seem to be frequently misstated. The comparisons in Table 9 clearly show that disentangling the effect of a factor on the probability of detecting fraud and its effect on the probability of committing fraud is important for us to draw sensible conclusions. Figure 5 plots the median historic and restated ROA for both the fraud and comparison samples from year -2 to year 2. I also examine the monitoring roles of large shareholders, institutional owners, independent auditors, and corporate boards. Second, I empirically examine the model predictions on the relation between fraud and corporate investment incentives, and find strong support for my theory. I further distinguish between cash-based acquisitions and stock-based acquisitions. Carcello, and Dana R. That is, p indicates the likelihood of an internal investigation of fraud when the cash flow realization does not automatically reveal fraud. Proof is provided in the appendix. The National Commission on Fraudulent Financial Re- porting states that young public companies have a proportionately greater risk of financial statement fraud. The determination of year 0 is discussed in Section 5. Investors are generally aware of the possibility of misreporting. I introduce a new empirical methodology to analyze fraud. Second, the marginal effects of net investing cash flows on P F have consistent signs across the two models, but substantially differ in magnitude 0. Section 10 b of the Securities Exchange Act of and the rules promulgated thereunder especially Rule 10 b -5 build the major substance of the broad anti-fraud provisions that make it unlawful for anyone to engage in fraud or misrepresentation in connection with the purchase or sale of a security.
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