Fraud characteristics and their effects on shareholder wealth

Abstract

This study examines characteristics of fraud cases and their effects on shareholder wealth in Germany. Using a sample of 126 fraud cases of listed German firms that became public between 1998 and 2014, we provide evidence that shareholder value decreases significantly in the days surrounding the revelation of a fraud case. Our analysis shows that shareholder wealth losses are remarkable, with a mean (median) loss of 80.78 million euros (47.03 million euros). Further, we find that the characteristics of fraud cases affect the financial consequences to investors. Our results indicate that shareholder wealth decreases more if at least one board member resigns due to the fraud case, but less if firms identify and reject accountable employees. Moreover, shareholder wealth decreases less if firms are willing to cooperate with legal authorities. Exploratory analysis suggests that reputational penalties are considerable for German firms. Our study contributes not only to accounting and corporate governance theory but also to practice in a number of ways. Our results reveal areas that are particularly important for regulators and where effective internal control systems are particularly beneficial. Further, our study identifies critical aspects that firms should consider in their communication with investors when fraud occurs.