What is the role of capital structure and industry to the probability of committing fraud?

Abstract

The aim of this study is to explain the challenges that organizations face when they belong to different industry and have different capital structure. This paper examines the effect of fraud on financial leverage and how this relation is influenced by capital structure by employing a range of 150 fraud USA firms for the period 2010–2020. We find that firms with high debt to equity at the year of fraud revelation and one year before are associated with higher chances of fraud commitment. More importantly, this positive relation is attenuated by specific industries such as technology and manufacturing. Another strong finding revealed by the research is that large organizations are more vulnerable to fraud as it is very likely to face information mismatch between executives which will lead to wrong decisions. Our results lend strong support to the notions that both corporate debt and size of a firm can be served as a signal to the market to likelihood of fraud.