Essays on Corporate Fraud and Racial Animus

Date of Graduation

5-2024

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Finance

Advisor/Mentor

Lee, Wayne Y.

Committee Member

Malakhov, Alexey

Second Committee Member

Riley, Timothy B.

Third Committee Member

Lynch, Andrew

Keywords

Corporate fraud; Race and ethnicity; mutual funds

Abstract

This dissertation consists of two essays focusing on the effect of corporate fraud on mutual funds’ portfolio decisions and the impact of racial and ethnic animus on fund performance. The first essay examines how sophisticated investors respond to a higher corporate fraud intensity in a state. We find that mutual funds hold less equity in non-fraudulent local firms when the state-level fraud intensity is higher, and the result is concentrated in short-horizon funds but not for long-horizon funds. To establish causality, we employ Regulation SHO in 2004 as a plausibly exogenous event to corporate fraud intensity and find affirmative results. Increased holding and information cost for mutual funds when a state’s fraud intensity becomes higher appear to be the underlying mechanisms that help explain the finding. Overall, our study provides new evidence on how information risk induced by corporate frauds affects mutual funds’ investment behavior and highlights the asymmetry in costs that short- and long-horizon funds face. The second essay explores the effect of sociopolitical racial/ethnic animus on work performance. During the unexpected 2020-2021 “AAPI Hate,” mutual funds with female managers perceived as of East Asian descent (the primary targets) experienced performance deterioration relative to other female managers. The impact intensified in states with higher anti-Asian crime rates or sentiment, among more actively managed portfolios, and when these managers play leadership roles. We address alternative hypotheses, including investor redemption, workplace animus, childcare challenges, and concerns for families overseas during the pandemic. Performance deterioration manifests itself mainly in stock picking. Our study highlights the negative productivity impact of racial-ethnic animosity even when it arises outside the workplace and the labor market.

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