Industry informational interactions and corporate fraud

Abstract

Abstract We examine three information channels through which product market interactions in an industry can affect firms incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firms information and greater use of relative performance evaluation encourage the commission of financial fraud. Industry structures that give rise to less collection of information about individual firms decrease the probability of fraud detection and increase the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.