CEO-Director Connections and Corporate Fraud

43 Pages Posted: 24 Sep 2010 Last revised: 7 Nov 2010

See all articles by N.K. Chidambaran

N.K. Chidambaran

Fordham University; Fordham University

Simi Kedia

Rutgers Business School

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 23, 2010

Abstract

We study the propensity of firms to commit financial fraud using a sample of SEC enforcement actions from 2000 to 2006. Controlling for year effects, Fama-French 48-industry effects, and several firm characteristics, we find a significant relation between fraud probability and CEO-board connectedness. The nature of this relation depends on the institutional origin of the connection. While nonprofessional connectedness due to shared educational and non-business antecedents increase fraud probability, professional connections formed due to common prior employment decrease fraud. The positive effects of professional connectedness are pronounced only when individuals share prior service as executives. The impact of professional-connections persist after the 2002 Sarbanes-Oxley Act while nonprofessional connections lose significance after SOX. Our results suggest that social ties matter and they can have very different effects depending on the institutional context in which the ties are formed. The results support a “collaborative board” perspective in which directors are not merely monitors but also provide advice and counsel to CEOs.

Keywords: Fraud, board of directors, corporate governance, social networks

JEL Classification: G30, G32, G34, G38

Suggested Citation

Chidambaran, N.K. and Kedia, Simi and Prabhala, Nagpurnanand, CEO-Director Connections and Corporate Fraud (September 23, 2010). Fordham University Schools of Business Research Paper No. 2010-009, Available at SSRN: https://ssrn.com/abstract=1681472 or http://dx.doi.org/10.2139/ssrn.1681472

N.K. Chidambaran

Fordham University ( email )

140 West 62 St, #448
New York, NY 10023
United States

Fordham University

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Nagpurnanand Prabhala (Contact Author)

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

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