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Product Similarity, Benchmarking, and Corporate Fraud
Published online by Cambridge University Press: 07 April 2025
Abstract
We document that firms with greater product similarity to their peers exhibit lower rates of financial fraud. We show that peer similarity is associated with better information environments, which is consistent with monitors’ enhanced ability to benchmark against other firms. The negative relation between product similarity and fraud remains after controlling for alternative mechanisms including incentive compensation structures, competition, and internal and external governance characteristics. Overall, our findings suggest that greater peer similarity increases the marginal cost of fraud, and therefore, ex ante disincentivizing managers from committing fraud.
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- Research Article
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- Copyright
- © The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
The U.S. Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or members of the staff. This article was initially released prior to the authors joining the Commission. We thank Ran Duchin (the editor) and an anonymous referee for constructive feedback and Anne Albrecht, Khrystyna Bochkay, Donald Bowen, Jeff Chen, Joey Engelberg, Will Gerken, Umit Gurun, Gerard Hoberg, Andy Imdieke, Simi Kedia, Dan Li, Zack Liu, Michelle Lowry, Tanakorn Makaew, Gonzalo Maturana, Karen Nelson, Jordan Neyland, Joerg Picard, Vesa Pursiainen, Nathan Swem, Xinxin Wang, Jared Wilson, participants at the 2019 Conference on Financial Market Regulation, the 2018 FMA Asia Annual Conference, the 2018 FMA Annual Meeting, the 2018 Australasian Banking and Finance Conference, the 2018 New Zealand Finance Conference, the 2019 Midwest Finance Association Conference, and the 2022 Boca Corporate Finance and Governance Conference, as well as seminar participants at Drexel University, Clemson University, Southern Methodist University, Texas Christian University, Universidad de los Andes, University of Nevada Las Vegas, the U.S. Securities and Exchange Commission, and Villanova University for helpful comments. We further thank Gerry Martin for graciously sharing data on the incidence of financial misreporting.
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