The Agency Costs of Managerial Indiscretions: Sex, Lies, and Firm Value
Brandon N. Cline
Mississippi State University
Ralph A. Walkling
Drexel University - Lebow College of Business
Adam S. Yore
University of Missouri at Columbia - Department of Finance
March 9, 2016
Personal managerial indiscretions are separate from a firm’s business activities but indicate the integrity of an executive. Consequently, they are important signals of trust to a firm’s counterparties. We find that the accused executives’ companies experience significant wealth deterioration, reduced operating margins, and lost business partners. Indiscretions are also associated with an increased probability of unrelated shareholder-initiated lawsuits, DOJ/SEC investigations, and managed earnings. We further find that CEOs and boards face labor market consequences, including forced turnover, pay cuts or lower shareholder votes at reelection. Indiscretions are more likely in poorly governed firms where disciplinary turnover is less likely.
Number of Pages in PDF File: 65
Keywords: managerial indiscretions, management quality, integrity, class action lawsuits, fraud, earnings management, corporate governance, managerial labor markets, director elections, CEO turnover
JEL Classification: G34, G39, K42
Date posted: March 17, 2010 ; Last revised: March 10, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
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