Market Integrity Rewards and the Potential of Corporate Fraud Exposure Capital Gains

This chapter explores the potential for profiting from corporate fraud exposure through short selling. It discusses the prevalence of fraud in public companies, emphasizing that official statistics often underreport the true extent of the problem.The chapter highlights the significant financial losses caused by corporate fraud globally, suggesting an opportunity for investors. However, realizing profits from fraud shorting presents challenges, including institutional and structural barriers, the time-sensitive nature of fraud exposure, and complex regulatory environments. The Canadian Paradox is introduced, emphasizing the potential for undetected corporate fraud in high-trust countries. The chapter concludes by discussing the negative perception of short selling and the regulatory challenges faced by investors, while also highlighting alternative financial instruments for profiting from a fraud short investment strategy. To determine the viability of a fraud short investment strategy, investors must consider several key questions: the prevalence of corporate fraud; the number of fraudulent corporations and the amount of the corporate fraud in those corporations. Also, the potential capital gains from shorting fraudulent companies. In addition, the costs associated with fraud detection and exposure (man, machine and material). And finally, the risks involved in a fraud short investment strategy.