Why Do Corporations Become Criminals? Ownership, Hidden Actions, and Crime as an Agency Cost
Cindy R. Alexander
U.S. Securities and Exchange Commission (SEC)
Mark A. Cohen
Vanderbilt University - Owen Graduate School of Management; Vanderbilt University - Law School; Resources for the Future
Journal of Corporate Finance, Vol. 5, 1999
We examine the relationship between ownership structure and corporate crime. Our approach draws upon two lines of research: (1) the theory of the firm which poses ownership as a critical incentive mechanism and (2) the economic theory of corporate crime, which emphasizes the role played by top management in affecting crime in the corporation. We find that crime occurs less frequently among firms in which management has a larger ownership stake. Our results imply that penalizing "corporations" (shareholders) deters crime, and that corporate crime tends not to benefit shareholders, ex ante. Rather than being something shareholders have encouraged, corporate crime appears to reflect an agency cost limited but not optimally eliminated through the costly efforts of top management. The evidence is consistent with the notion that ownership structure plays an important role in aligning the hidden actions of top management with the shareholder interest.
Number of Pages in PDF File: 37
JEL Classification: G32, G38, K14, K22Accepted Paper Series
Date posted: June 16, 1997 ; Last revised: November 19, 2012
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