Yanbo Wang, Boston University

Fraud and Innovation: Is There a Cheater's Discount?

October 3, 2013 | 12:00pm - 1:00pm | Morgan 350 | Harvard faculty and doctoral students only

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Fraud and Innovation: Is There a Cheater's Discount? 

 Yanbo Wang (Boston University) & Jizhen Li (Tsinghua University)


ABSTRACT

 Fraudsters seem to possess many of the traits that are associated with innovations – they disrespect the established ways of doing things; they think outside the box to create their own ways obtaining what they want; and in this process they embrace the risks of failure and even social sanctions. However, there are also good reasons to expect fraudulent firms to be less innovative than their nonfraudulent peers as cheating buffers firms from external pressures and thus fosters managerial complacency. In this paper, we develop a theory that links resource acquisition with resource allocation. We argue that resources required through fraudulent means are less likely to be allocated to productive activities such as technological innovation. We built a longitudinal dataset tracking the patenting behavior of 467 Chinese hi-tech firms to test our theoretical predictions. To avoid the bias in fraud identification relying on the often selective actions of the public-control agent, we use an unconventional approach – comparing two financial books of the same firms that are assumed to report the same financial data – to identify financial fraudulent among our sampled firms. We find that firms using fraudulent firms are less likely to use state grants for new knowledge creation.