Fraudulent Financial Reporting and the Consequences for Employees

Jung Ho Choi and Brandon Gipper

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: We examine employment effects, such as wages and employee turnover, before, during, and after periods of fraudulent financial reporting. To analyze these effects, we combine U.S. Census data with SEC enforcement actions against firms with serious misreporting (“fraud”). We find compared to a matched sample that fraud firms’ employee wages decline by 9% and the separation rate is higher by 12% during and after fraud periods while employment growth at fraud firms is positive during fraud periods and negative afterward. We discuss several reasons that plausibly drive these findings. (i) Frauds cause informational opacity, misleading employees to still join or continue to work at the firm. (ii) During fraud, managers overinvest in labor changing employee mix, and after fraud the overemployment is unwound causing effects from displacement. (iii) Fraud is misconduct; association with misconduct can affect workers in the labor market. We explore the heterogeneous effects of fraudulent financial reporting, including thin and thick labor markets, bankruptcy and non-bankruptcy firms, worker movements, pre-fraud wage levels, and period of hire. Negative wage effects are prevalent across these sample cuts, indicating that fraudulent financial reporting appears to create meaningful and negative consequences for employees possibly through channels such as labor market disruptions, punishment, and stigma.

Keywords: Wages; Employment Growth; Accounting Fraud; Information Asymmetry; Stigma (search for similar items in EconPapers)
JEL-codes: D83 J23 J31 M48 M51 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2019-03
New Economics Papers: this item is included in nep-hrm and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://www2.census.gov/ces/wp/2019/CES-WP-19-12.pdf First version, 2019 (application/pdf)

Related works:
Working Paper: Fraudulent Financial Reporting and the Consequences for Employees (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:19-12

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