Product Differentiation, Benchmarking, and Corporate Fraud

Abstract

We exploit a pairwise measure of product market differentiation to study the relation between economic comparability and financial accounting fraud. We show that firms with greater economic comparability exhibit a significantly lower incidence of fraud. Importantly, this effect is economically larger than that of most predictors of fraud documented in the literature. To help establish identification, we exploit economic comparability with rivals issuing IPOs, as well as cross-sectional variation in accounting comparability, firm complexity, institutional ownership, and analyst coverage. Our analyses suggest that greater economic comparability enhances the external information environment, which improves external monitoring and disciplines manager reporting behavior.