Executives' "Off-the-Job" Behavior, Corporate Culture, and Financial Reporting Risk

72 Pages Posted: 21 Apr 2012 Last revised: 10 Mar 2023

See all articles by Robert H. Davidson

Robert H. Davidson

Virginia Tech - Department of Accounting and Information Systems

Aiyesha Dey

Harvard Business School

Abbie Jean Smith

Independent

Date Written: April 2012

Abstract

We examine how executives' behavior outside the workplace, as measured by their ownership of luxury goods (low "frugality") and prior legal infractions, is related to financial reporting risk. We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives' frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs' reign, including the appointment of an unfrugal CFO, an increase in executives' equity-based incentives to misreport, and a decline in measures of board monitoring intensity.

Suggested Citation

Davidson, Robert H. and Dey, Aiyesha and Smith, Abbie Jean, Executives' "Off-the-Job" Behavior, Corporate Culture, and Financial Reporting Risk (April 2012). NBER Working Paper No. w18001, Available at SSRN: https://ssrn.com/abstract=2042986

Robert H. Davidson (Contact Author)

Virginia Tech - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Aiyesha Dey

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Abbie Jean Smith

Independent ( email )

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