Research-Thesis: The long-term impact of financial fraud on U.S. public companies: a profitability analysis.

Abstract

Financial fraud represents one of the most severe breaches of corporate integrity, yet its long-term consequences for firm profitability remain empirically underexplored. This study examines whether fraud revelation leads to a lasting decline in the profitability of U.S. publicly listed companies, as measured by return on assets (ROA), return on equity (ROE), and net profit margin (NPM), over a five-year post-revelation window. The empirical strategy relies on a difference-in-differences design applied to a sample of 89 fraud firms identified through SEC Accounting and Auditing Enforcement Releases (AAERs) and 274 control firms, covering fraud revelations between 2000 and 2023. Entropy balancing ensures pre treatment comparability, and the parallel trends assumption is validated through a placebo test, an event study, and a formal F-test (p = 0.986). Five robustness checks and eight heterogeneity analyses complement the main estimation. The results reveal a persistent negative effect on ROE, with fraud firms generating returns approximately 5.5 percentage points below comparable control firms, equivalent to roughly 50% of the pre-fraud baseline. This effect is directionally consistent across all robustness checks and reaches conventional significance under heteroskedasticity-robust standard errors. ROA and NPM show no statistically significant average effect, a theoretically coherent pattern: the financing channel activates first and most uniformly, while operational channels are heterogeneous and concentrated in high-severity cases. Heterogeneity analyses show that the effect is most severe among highly leveraged firms, industry underperformers, and firms with weak pre-fraud profitability. The speed of recovery analysis confirms that approximately 45% of fraud firms had not recovered their pre-fraud ROE baseline five years after revelation. Overall, H1 is partially supported. These findings extend the largely market-based evidence on fraud costs into the domain of long-run accounting performance and identify pre-existing financial resilience as the single most powerful moderator of post-fraud vulnerability.