Manufacturing and Fraud: Evidence from Price Competition and Lean Inventories

Abstract

We examine fraud from an industry competition perspective, oriented from inventory theory. We find that fraud occurs among manufacturers more than nonmanufacturers and that the association between price competition and fraud is significantly more pronounced in the manufacturing sector. Aggregating inventory and cash flow patterns to the industry level, we report that industry inventory imbalance rates, from either excessive stockpiling or inventory leanness, associate with increased future price competition, which subsequently associates with more fraud. However, for manufacturers, the industry-wide prevalence of either excess or leanness amplifies future price competition, which is observed as a U-shaped association that ultimately ties to more fraud. These effects are stronger when extreme leanness is the manufacturing industry’s standard. We also provide evidence that the association between price competition and fraud is comparable to managerial incentives’ association with fraud. Together, our findings contribute to the literature on price competition, inventory management, and corporate misconduct. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M11; M21; M41; L60.