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Fraud commitment in a smaller world: Evidence from a natural experiment

Jiacai Xiong, Caiyue Ouyang, Jamie Yixing Tong and Feida Frank Zhang

Journal of Corporate Finance, 2021, vol. 70, issue C

Abstract: This study examines the effect of proximity on corporate fraud commitment using the introduction of high-speed rail (HSR) as an exogenous shock to travel time. We find that firms commit less corporate fraud after the introduction of an HSR route. A dynamic difference-in-differences (DiD) analysis shows that the effect of HSR introduction on fraud only occurs after the HSR route is launched, supporting the parallel trends assumption and confirming the causal relationship. Further analysis shows that the negative impact of HSR introduction on corporate fraud is more pronounced for firms that have higher information asymmetry or weaker monitoring mechanisms in the pre-HSR period. In addition, we find that HSR introduction increases corporate site visits by external monitors and that visits significantly reduce corporate misbehavior. Overall, our findings suggest that HSR introduction increases proximity and thereby reduces the information acquisition costs for outside monitors. As a result, outside monitors are in a better position to oversee firms, leading to decreased fraud commitment.

Keywords: High-speed railway; Information acquisition; Acquisition cost; Fraud commitment (search for similar items in EconPapers)
JEL-codes: G34 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jcorpfin.2021.102090

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