CEO-Director Connections and Corporate Fraud
Fordham University - Schools of Business
Rutgers Business School
Nagpurnanand R. Prabhala
University of Maryland - Robert H. Smith School of Business
March 15, 2012
We study the relation between fraud and CEO-board connectedness. While nonprofessional connections due to shared non-business service or alma mater increase fraud probability, professional connections from employment overlaps lower the incidence of fraud. The benefits of professional connectedness are pronounced when individuals share service as executives rather than as directors or as director and executive. The results are robust to firm-specific controls, industry and time period controls, coopted directors, and measures of director quality and heterogeneity. While frauds have led regulators to (successfully) push for independent directors, our results suggest that independence is only necessary, not sufficient. Heterogeneity within the set of independent directors seems to be at least as important as independence per se.
Number of Pages in PDF File: 50
Keywords: corporate fraud, professional connections, non-professional connections, board independence, education connections, social ties, SOX effects
JEL Classification: G30, G32, G34, G38
Date posted: March 16, 2012
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