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Consequences of Fraud and Overcoming Negative Market Reaction

Title:

Consequences of Fraud and Overcoming Negative Market Reaction

Karajian, Sarine (2016) Consequences of Fraud and Overcoming Negative Market Reaction. Masters thesis, John Molson School of Business.

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Abstract

This paper investigates firms that have attracted scrutiny from the SEC and that have been found to be involved in fraud. We examine the market reaction for the sample of firms following the announcement of their involvement in fraud, which we refer to as trigger event. We match our sample of firms with others by industry, size, market-to-book and Altman Z-Score to compare our sample of firms with others that have not been involved in fraud at the time of trigger event. We find that the fraud sample attract negative and significant returns following the announcement of fraud, in contrast to the control sample. We also examine tactics that firms may use to regain the market’s confidence, such as changes in executives, auditing firm and company name. We find that the market reacts negatively right after the change in executives, but the negative trend is reversed in the long-term for the firms that make the executive change quickly after the trigger event. Similarly, firms that change their auditing firm quickly are better off. We also find that there is significantly higher information asymmetry during the trigger event, litigation date, as well as changes in CEO, CFO and auditor. We also use accrual models to identify earnings management and find that the non-discretionary accruals Jones and Modified Jones models show a significant difference between the two samples, matched and fraud, at the year of the trigger event. Finally, we investigate whether any accounting variables predict financial distress. We find that profitability ratios as well as changes in CFO and auditor are positively and significantly related to and therefore predict the absence of financial distress, in contrary to high debt, according to our findings, predict financial distress.

Divisions:Concordia University > John Molson School of Business > Finance
Item Type:Thesis (Masters)
Authors:Karajian, Sarine
Institution:John Molson School of Business
Degree Name:M. Sc.
Program:Business Administration (Finance specialization)
Date:29 March 2016
Thesis Supervisor(s):Ullah, Saif
Keywords:Fraudulent activities Accounting Fraud CEO, CFO and auditor turnover Prediction of Distress Bankruptcy Mergers and Acquisitions Deletion
ID Code:980700
Deposited By: SARINE KARAJIAN
Deposited On:17 Jun 2016 14:13
Last Modified:18 Jan 2018 17:51

References:

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