Audra Boone, PhD, Professor of Finance, Neeley School of Business at Texas Christian University

Product Differentiation, Benchmarking, and Corporate Fraud

We find that firms with lower product market differentiation exhibit significantly lower rates of fraud. This relationship is more pronounced for complex firms and is robust to controlling for various measures of competition, predictors of fraud, and industry heterogeneity. To help establish causality, we show this relationship holds when we exploit changes in product differentiation stemming from rivals’ IPO and acquisition activity. Finally, we find that IPOs (and acquisitions) of rivals facilitate the detection of fraud for firms with ex ante greater product differentiation. Overall, our findings suggest that lower differentiation disciplines firms by facilitating fraud detection through a benchmarking channel.

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