Executives' "off-the-job" behavior, corporate culture, and financial reporting risk

Robert Davidson, Aiyesha Dey, Abbie Smith

Research output: Contribution to journalArticle

60 Scopus citations

Abstract

We examine how executives' behavior outside the workplace, as measured by their ownership of luxury goods (low "frugality") and prior legal infractions, is related to financial reporting risk. We predict and find that chief executive officers (CEOs) and chief financial officers (CFOs) with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives' frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high and increasing probabilities of other insiders perpetrating fraud and unintentional material reporting errors during their tenure. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs' reigns, including the appointment of an unfrugal CFO, an increase in executives' equity-based incentives to misreport, and a decline in measures of board monitoring intensity.

Original languageEnglish (US)
Pages (from-to)5-28
Number of pages24
JournalJournal of Financial Economics
Volume117
Issue number1
DOIs
StatePublished - Jul 1 2015

Keywords

  • Corporate culture
  • Executive frugality
  • Financial reporting risk
  • Legal infractions

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