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

Robert Davidson; Aiyesha Dey; Abbie Smith

doi:10.1016/j.jfineco.2013.07.004

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

Robert Davidson, Aiyesha Dey, Abbie Smith

Accounting

Research output: Contribution to journal › Article › peer-review

72 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 language	English (US)
Pages (from-to)	5-28
Number of pages	24
Journal	Journal of Financial Economics
Volume	117
Issue number	1
DOIs	https://doi.org/10.1016/j.jfineco.2013.07.004
State	Published - Jul 1 2015

Bibliographical note

Funding Information:
We appreciate the helpful comments of William Schwert (the editor), Luigi Guiso (the referee), David Cooper, Harry Davis, Patricia Dechow, Adam Galinsky, Alan Jagolinzer, Sunil Kumar, Andy Leone, Thomas Lys, Brian Miller, Stewart Myers, and the seminar participants at Harvard Business School, University of British Columbia, the George Mason Conference on Investor Protection, Corporate Governance, and Fraud Prevention, James Madison University, University of Minnesota, the Stanford Summer Accounting Conference, the Washington, DC Summer Accounting Conference, the University of Washington, and the 2011 NBER conference, Causes and Consequences of Corporate Culture. We thank Brian Miller for sharing data on reporting errors with us. We also benefited from discussions with Scott Turow and from the financial support from the Fama-Miller Center for Research in Finance and the Accounting Research Center at the University of Chicago Booth School of Business and the Institute for Fraud Prevention.

Publisher Copyright:
© 2013 Elsevier B.V.

Copyright:
Copyright 2015 Elsevier B.V., All rights reserved.

Keywords

Corporate culture
Executive frugality
Financial reporting risk
Legal infractions

Access

10.1016/j.jfineco.2013.07.004

Cite this

@article{f182e3706c3042ee84f59bd3c8c0f2b1,

title = "Executives' {"}off-the-job{"} behavior, corporate culture, and financial reporting risk",

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.",

keywords = "Corporate culture, Executive frugality, Financial reporting risk, Legal infractions",

author = "Robert Davidson and Aiyesha Dey and Abbie Smith",

note = "Funding Information: We appreciate the helpful comments of William Schwert (the editor), Luigi Guiso (the referee), David Cooper, Harry Davis, Patricia Dechow, Adam Galinsky, Alan Jagolinzer, Sunil Kumar, Andy Leone, Thomas Lys, Brian Miller, Stewart Myers, and the seminar participants at Harvard Business School, University of British Columbia, the George Mason Conference on Investor Protection, Corporate Governance, and Fraud Prevention, James Madison University, University of Minnesota, the Stanford Summer Accounting Conference, the Washington, DC Summer Accounting Conference, the University of Washington, and the 2011 NBER conference, Causes and Consequences of Corporate Culture. We thank Brian Miller for sharing data on reporting errors with us. We also benefited from discussions with Scott Turow and from the financial support from the Fama-Miller Center for Research in Finance and the Accounting Research Center at the University of Chicago Booth School of Business and the Institute for Fraud Prevention. Publisher Copyright: {\textcopyright} 2013 Elsevier B.V. Copyright: Copyright 2015 Elsevier B.V., All rights reserved.",

year = "2015",

month = jul,

day = "1",

doi = "10.1016/j.jfineco.2013.07.004",

language = "English (US)",

volume = "117",

pages = "5--28",

journal = "Journal of Financial Economics",

issn = "0304-405X",

publisher = "Elsevier",

number = "1",

}

TY - JOUR

T1 - Executives' "off-the-job" behavior, corporate culture, and financial reporting risk

AU - Davidson, Robert

AU - Dey, Aiyesha

AU - Smith, Abbie

N1 - Funding Information: We appreciate the helpful comments of William Schwert (the editor), Luigi Guiso (the referee), David Cooper, Harry Davis, Patricia Dechow, Adam Galinsky, Alan Jagolinzer, Sunil Kumar, Andy Leone, Thomas Lys, Brian Miller, Stewart Myers, and the seminar participants at Harvard Business School, University of British Columbia, the George Mason Conference on Investor Protection, Corporate Governance, and Fraud Prevention, James Madison University, University of Minnesota, the Stanford Summer Accounting Conference, the Washington, DC Summer Accounting Conference, the University of Washington, and the 2011 NBER conference, Causes and Consequences of Corporate Culture. We thank Brian Miller for sharing data on reporting errors with us. We also benefited from discussions with Scott Turow and from the financial support from the Fama-Miller Center for Research in Finance and the Accounting Research Center at the University of Chicago Booth School of Business and the Institute for Fraud Prevention. Publisher Copyright: © 2013 Elsevier B.V. Copyright: Copyright 2015 Elsevier B.V., All rights reserved.

PY - 2015/7/1

Y1 - 2015/7/1

N2 - 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.

AB - 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.

KW - Corporate culture

KW - Executive frugality

KW - Financial reporting risk

KW - Legal infractions

UR - http://www.scopus.com/inward/record.url?scp=84931064702&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84931064702&partnerID=8YFLogxK

U2 - 10.1016/j.jfineco.2013.07.004

DO - 10.1016/j.jfineco.2013.07.004

M3 - Article

AN - SCOPUS:84931064702

VL - 117

SP - 5

EP - 28

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 1

ER -

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

Abstract

Bibliographical note

Keywords

Access

Other files and links

Fingerprint

Cite this