Deterrence Effect and Opportunistic Corporate Fraud

Abstract

While theory suggests the existence of a regulatory deterrence effect on fraud, little is known about its quantitative significance. Using unique data, I estimate a model of strategic corporate fraud that quantifies firms' adjustments of fraud propensities in response to their expectations of regulators' information processing capacity. I find that 10 to 58 additional firms commit fraud each year with a one standard deviation change in the main forms of SEC regulatory intervention. I further exploit exogenous variation in regulatory attention from the 2005 option backdating scandal and find support for opportunistic fraud and the SEC's deterrence effect.

Keywords: deterrence, fraud, opportunistic behavior, detection, SEC, regulatory intervention, detection-controlled estimation, criminology

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