Is economic policy uncertainty an excuse for corporate fraud?

Abstract

This study examines the dynamic relationship between economic policy uncertainty (EPU) and corporate fraud by using a sub-sample time-varying rolling window test. Corporate fraud is classified as fraud incidents (the number of corporate frauds) and fraud magnitude (the severity of corporate frauds). Based on this, we propose an EPU-Fraud Triangle model to evidence that EPU affects corporate fraud by acting on Pressure, Opportunity, and Rationalization. The empirical results show that corporations are more likely to engage in fraud during high EPU periods. Moreover, corporate fraud has positive impacts on EPU. As a result, this study suggests corporations consider fraud consequences and policy trends when making decisions. Additionally, government policymakers should analyze the causes of corporate fraud to develop appropriate policies. In addition, to minimize information asymmetries, investors should pay attention to corporate fraud and remain knowledgeable of national policy trends. Furthermore, the study can contribute to the smooth functioning of macroeconomics and reduce the probability of financial risks.