The Impact of Financial Fraud on Financial Risks: A Case Study of Luckin Coffee

Abstract

On April 2, 2020, Luckin coffee issued a public statement acknowledging financial fraud which caused their stock price to collapse. This paper studies the cases of Luckin coffee's fraud, focusing on the analysis of the impact of financial fraud on the financial risks of enterprises. This paper uses the Altman's Z-score model and decomposes the firm's financial risks into five factors. It is shown that the inflated revenue can have a substantial impact on four of the factors which can mislead the investors. After the financial fraud, the reputation of an enterprise will be affected, which will reduce its financing ability in the future and eventually lead to an increase in its financial risks.