Economic policy uncertainty and corporate fraud

Abstract

We investigate the relationship between economic policy uncertainty (EPU) and corporate fraud. We find that firms are more likely to engage in corporate fraud during times of high EPU. Such a finding is robust to the undetected fraud and other potential endogeneity concerns. Moreover, we find that a strong institutional environment can weaken the positive association between EPU and corporate fraud, and the frauds of firms whose headquarters are located in a region that is less dominated by the community of interest with mainstream ideology are mitigated. The empirical results also show that the listed firms are more likely to participate in misconduct to the extent that the fraud deserves public condemnation, criticism, and an official warning without monetary fines being levied.