The financial cost of corporate fraud: is postfraud CSR a trust-rebuilding strategy or window dressing?

What is it about?

Using U.S. firms named in SEC Accounting and Auditing Enforcement Releases from 1987 to 2020, this study examines how fraud revelation is associated with firms’ external financing, investment, and dividend payout decisions. The findings show that these three financial policies decline following fraud revelation and become more interdependent. The study also finds that fraud firms increase CSR more than matched non-fraud firms in the post-fraud period. Higher post-fraud CSR is further associated with lower stock price crash risk and a lower cost of capital. The findings are more consistent with CSR being used as a trust-rebuilding strategy after corporate misconduct than as purely symbolic window dressing.

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