International evidence on the relationship between fraud tolerance and stock price crash risk

Abstract

Employing a sample of 16,718 firms across 38 countries from 2000 to 2022, we find that ex ante attitudes in society toward dishonest behavior, instead of fraudulent acts, are adequate to provoke firm-level stock price crash risk. Specifically, we document that fraud tolerance in society is positively related to crash risk. The result implies that fraud tolerance promotes managerial opportunistic behavior such as bad news hoarding. Robustness checks show that the result holds after we account for potential issues of endogeneity. We also find evidence implying that ineffective monitoring is a channel connecting fraud tolerance and crash risk. Additional analyses provide results suggesting that fraud tolerance is a persistent behavioral norm unaffected by national culture, including individualism, uncertainty avoidance, and long-term orientation.