Fraudulent Financial Reporting and the Consequences for Employees

Jung Ho Choi and Brandon Gipper
Additional contact information
Brandon Gipper: Stanford University Graduate School of Business

Research Papers from Stanford University, Graduate School of Business

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.

JEL-codes: D83 J23 J31 M48 M51 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-hrm and nep-lma
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/476001
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Fraudulent Financial Reporting and the Consequences for Employees (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3771

Access Statistics for this paper

More papers in Research Papers from Stanford University, Graduate School of Business Contact information at EDIRC.
Bibliographic data for series maintained by (workingpapers@econlit.org).