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http://ssrn.com/abstract=1681472
 
 

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CEO-Director Connections and Corporate Fraud


N.K. Chidambaran


Fordham University - Schools of Business

Simi Kedia


Rutgers Business School

Nagpurnanand R. Prabhala


University of Maryland - Robert H. Smith School of Business

September 23, 2010

Fordham University Schools of Business Research Paper No. 2010-009

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.

Number of Pages in PDF File: 43

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

JEL Classification: G30, G32, G34, G38

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Date posted: September 24, 2010 ; Last revised: November 7, 2010

Suggested Citation

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

Contact Information

N.K. Chidambaran
Fordham University - Schools of Business ( email )
United States

Simi Kedia
Rutgers Business School ( email )
117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)
Nagpurnanand R. Prabhala (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
4427 Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2165 (Phone)
301-405-0359 (Fax)
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