This paper examines the impact of ex ante fraud risk on a firm’s stock market performance and how firms respond to this risk. Using a detection-controlled estimation framework and new instrumental variables, the ex ante probabilities of a firm (1) committing fraud and (2) being detected for fraud are estimated. It is found that firms with a high fraud detection probability have low returns, which is consistent with the large negative stock returns observed upon the revelation of fraud. In contrast, firms with a high probability of committing fraud have higher returns, which is consistent with the view that fraudulent firms are riskier on average. Additionally, firms with a high probability of committing fraud are observed to hold less cash, invest less, and increase payouts, while those with a high probability of detection tend to hold more cash.