The effect of ex ante litigation risk on corporate fraud: Evidence from securities class action act in Korea

Abstract

Using the phased adoption of the Securities Class Action (SCA) Act in South Korea as a quasi-exogenous event escalating ex ante litigation risks for Korean firms, we explore the effect of heightened litigation risks on firms’ involvement in fraudulent activities. We find that, following the implementation of the SCA Act, companies affected by the new legislation are more likely to reduce instances of corporate fraud compared to those not bound by the Act. These results suggest that the introduction of the SCA Act effectively mitigates corporate fraud by amplifying the ex ante litigation risks faced by the firms.