MINNEAPOLIS, July 17 (UPI) -- Investor optimism encourages corporate fraud, a University of Minnesota study said.
The study, published in the July issue of The Review of Financial Studies, also said requiring detailed reporting statements or prospectuses can increase fraud rather than decrease it -- "because the accounting tends to get more creative to demonstrate good returns for the investor audience," said Andrew Winton, finance department chairman of the university's Carlson School of Management in Minneapolis.
As for investor optimism encouraging fraud, Winton said, "Even if investors are optimistic for good reason ... that will encourage fraud" due to rising expectations.
The telecommunications industry is among the sectors in which fraud can be expected, the study said.
By contrast, in an industry with strong market conditions, a change that causes investors to loosen standards for firms with weak results actually reduces fraud because those firms see less need for it, the study found.
"This work has strong implications for regulators, more than anyone else, because it suggests they should not just look at the accounting numbers to detect fraud, but also at factors like the overall health of the industry and the general state of the market," Winton said.
