In my dissertation, I explore the factors which impact the outcome of financial misconduct. Financial misconduct imposes negative externalities on firm value, influences investment decisions, and results in both wealth transfer and destruction. The unique governance structure in the asset management industry amplifies the role of investors on firm behavior. I provide novel evidence on the variation in response towards enforcement actions by investor types; I find evidence consistent with two non-mutually exclusive explanations for this heterogeneity. First, investor sophistication affects the effective cost of information acquisition and processing, making the fund flow discipline less prevalent for retail investors. Second, investors are less likely to punish funds when the costs of moving capital become substantial. Besides investors, other market participants also significantly affect firm behavior. Internal factors, such as corporate culture, along with external factors, such as product market competition, have significant impact on corporate fraud. For example, a lack of focus on integrity in corporate culture is associated with unethical corporate behavior, cultures that neglect integrity are associated with a greater probability of SEC enforcement actions for accounting misstatements. In addition, firms with lower product market differentiation exhibit significantly lower rates of fraud; the relationship is more pronounced for complex firms and is robust to controlling for various measures of competition, predictors of fraud, and industry heterogeneity. Overall, the findings suggest that lower differentiation disciplines firms by facilitating fraud detection through a benchmarking channel.
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