Proxies and Databases in Financial Misconduct Research

An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which regulators brought enforcement actions for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four features of each database that affect inferences from empirical tests. First, each database contains information on only its proxy event (e.g., restatements) that many researchers use to identify misconduct and do not cover other relevant announcements that can affect a researcher's interpretation and use of the events. Second, the initial public revelation of financial misconduct occurs, on average, months before the initial coverage in these databases, leading to discrepancies in event study measures and pre/post comparison tests. Third, most of the events captured by these databases are unrelated to financial fraud, and efforts to cull non-fraud events yield heterogeneous results. Fourth, three of the four databases omit large numbers of events they are designed to capture. We show the extent to which each database is subject to these concerns and offer suggestions for researchers using these databases