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Information Production, Misconduct Effort, and the Duration of Corporate Fraud

We develop and test a model linking the duration of financial fraud to information produced by auditors and analysts and efforts by managers to conceal the fraud. Our empirical results suggest fraud termination is more likely in the quarter following the release of audited financial statements, especially when reports contain explanatory language, indicating auditors’ observable signals reduce fraud duration. Analyst attention increases the likelihood of fraud termination, but the marginal effect beyond the first analyst is negative, possibly due to free riding and herding behavior impairing analysts’ ability to illuminate misconduct. Finally, evidence suggests managerial concealment significantly increases fraud duration.

JEL classification: G34; G38; K22; K42; L51; M41.
Keywords: Fraud duration; Information production; Fraud effort; Auditor reports; Hazard models.

Suggested citation: Black, Jonathan, Mattias Nilsson, Roberto Pinheiro, and Maximiliano da Silva, 2016. “Information Production, Misconduct Effort, and the Duration of Corporate Fraud,” Federal Reserve Bank of Cleveland Working Paper, no. 16-13.

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