Income Statement Fraud and Balance Sheet Fraud: Different Manipulations, Different Incentives

Robert H Davidson
Pamplin School of Business, Virginia Polytechnic Institute and State University

January 2017


I find managers commit income statement fraud (fraud in which manipulations increase net income) when market price sensitivity to earnings news is high and their firms’ stock price is relatively more sensitive to idiosyncratic earnings performance. Managers commit balance sheet fraud (fraud in which manipulations increase net assets but do not affect net income) when market-wide default risk is high and their firms have greater financial constraints. The results hold in samples of fraud firms derived from SEC enforcements, class action lawsuits, and a subsample in which fraud was detected internally or by employee whistleblowers.

JEL Classification Codes: G30; G34; G38; G39

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