Accounting fraud: Booms, busts, and incentives to perform

In this thesis, I examine whether macroeconomic conditions influence the propensity to commit accounting fraud. I find that the incidence of observed accounting fraud is increasing in GDP and is at its highest in the periods leading up to an economic peak. In addition, the incidence of observed accounting fraud is decreasing in the average correlation between firm and market returns and the average magnitude of analyst forecast errors; the relation is increasing in market price-earnings ratios. When examining the relation between macroeconomic conditions and firm-level fraud determinants I find that the association between CEO compensation incentives and the propensity to observe accounting fraud is generally negative, but is positive and significant during periods of high price sensitivity to earnings news. I also find that although the association between the firm's need for external financing and the propensity to observe accounting fraud is positive, it is only significant during periods of high price sensitivity to earnings news. Analyzing accounting fraud by type reveals that revenue fraud is increasing in price sensitivity to revenue news; this relation does not exist for expense or balance sheet fraud. Balance sheet fraud is increasing in the default risk premium. These results are consistent with the hypothesis that market-wide incentives for managers to manipulate earnings influence the decision to commit accounting fraud above and beyond firm-level determinants.