The SEC’s Deterrence Effect on Corporate Fraud

Abstract

I estimate, using hand-collected data, a model of strategic corporate fraud that incorporates and quantifies firms' adjustments to fraud propensities in response to their expectations of regulators' information processing capacity. The findings are economically significant. With a one standard deviation change in different regulatory interventions, 10 to 58 additional fraudulent cases are committed each year. I exploit the 2005 option backdating scandal as an exogenous shock to regulatory attention, and find further support for both opportunism in fraud and the SEC's deterrence effect. Heterogeneity in fraud driven by executive incentives and firm complexity is documented.

Keywords: Corporate fraud, opportunistic behavior, fraud detection, SEC, security law enforcement, regulatory intervention, detection-controlled estimation, criminology

JEL Classification: G38, K42, M41, C30, C35, C57