Nexus between Financial Reporting Fraud and Delegated Investments: Mediating role of Emotions and Delegated Investments Decisions

Financial reporting fraud is an important area of study in finance. However, reporting this fraud encounters new challenges with the changes in time and the state of affairs. Hence, this study is envisioned to investigate the mediating role of emotions and investment decisions in between financial reporting fraud and the performance of investment professionals under the delegated investment mechanism. The research is based on the responses collected through a self-administered questionnaire from 248 investment professionals in Pakistan selected through judgmental sampling. The proposed relationship was analyzed through the application of Partial Least Square Structure Equation Modeling (PLS-SEM) by using Smart PLS 4. The study discovered the full mediation of both emotions and short- and long-term investment decisions in the relationship between financial reporting fraud and investment performance. Cognizant to the fact that emotions and investment decisions mediate between fraudulent financial reporting and the performance of investment professionals; real investors may have a better understanding about who to hire to manage their investments. A well-selected competitive professional, at one end, is expected to safeguard the investors’ interest in the times of crises. While, at the other end, these professionals would bring economic stability by strengthening the investors’ trust on the financial market mechanisms as a result of their resilient professional support.