Alternative Data as an External Governance Mechanism

Abstract

Research Question/Issue

This study explores the relationship between the availability of alternative data and financial statement fraud among Chinese firms.

Research Findings/Insights

We first show that companies' online sales data, independently collected by a third-party data vendor, can detect financial statement fraud before 2018, before which such alternative data were not available to the public. Second, we find that the association between financial statement fraud and the proxy constructed from alternative data becomes weaker after the publicity of alternative data. Third, we find that the impact from alternative data availability on corporate financial statement fraud is greater among firms with weaker external governance, such as firms with less analyst coverage, as well as lower quality auditors.

Theoretical/Academic Implications

This study enhances the understanding of the relationship between information environment characteristics and corporate fraud. We suggest a new information intermediary, alternative data providers, and investigate the role that alternative data play in financial statement fraud. And we also add to the growing literature regarding the impact of technology on corporate fraud and corporate governance.

Practitioner/Policy Implications

This study proposes a new measure to capture company managers' hidden behavior and provide new insights regarding the usefulness of company-level online sales data, as provided by an independent entity in relation to financial statement fraud. These findings have important implications for investors, policymakers, and market participants in understanding the role of alternative data in detecting financial fraud and acting as an external governance mechanism.