The financial cost of corporate fraud: is postfraud CSR a trust-rebuilding strategy or window dressing?

Purpose This study aims to examine how fraud revelation affects firms’ external financing, investment and dividend payout decisions and whether the interdependence among these decisions changes after revelation. It also investigates whether postfraud corporate social responsibility (CSR) is more consistent with reputation restoration or window dressing. Design/methodology/approach The analysis uses US firms identified in Securities and Exchange Commission Accounting and Auditing Enforcement Releases between 1987 and 2020. The authors use univariate tests, single-equation regressions, three-stage least squares and difference-in-differences models. The authors then examine postfraud CSR and its association with stock price crash risk and the cost of capital. Findings Fraud revelation is associated with declines in external financing, investment and dividend payout, while the interdependence among these decisions strengthens. Fraud firms also increase CSR after revelation, and this increase is larger than in matched nonfraud firms. Higher postfraud CSR is associated with lower crash risk and a lower cost of capital, consistent with a reputation-restoration role. Research limitations/implications The findings show that the consequences of fraud extend beyond the initial enforcement event by affecting firms’ financial flexibility and the coordination of key financial policies. They also suggest evaluating postfraud CSR alongside observable information and financing outcomes. Originality/value This study extends the fraud literature by examining financing, investment and payout jointly rather than as isolated policies. It also contributes to the CSR literature by showing that postfraud CSR is associated with outcomes consistent with rebuilding credibility rather than purely symbolic engagement.