Corporate fraud and the value of reputations in the product market

Article history: Received 3 October 2012 Received in revised form 16 October 2013 Accepted 28 October 2013 Available online 1 November 2013 We examine the consequences of a damaged reputation for fraud firms in the context of product markets. We generate three direct measures of reputational damage and find evidence that customers impose significant reputational sanctions on fraud firms. Using yearly transactional data to track the business dealings of fraud firms with large customers, we show that customer reputational sanctions result in a decline in the firm's operating performance through increased selling costs, as suggested by previous studies of corporate reputation. We further find that reputational losses estimated from an event study approach reflect the actual decrease in the revenue of a fraud firm, which suggests that the event study approach yields a reliable measure of reputational losses. Finally, we document that these findings are the result of a damaged reputation following the detection of fraud rather than an effect of adverse information revealed upon fraud detection. © 2013 Elsevier B.V. All rights reserved. JEL classification: G30 G34