CEO Connectedness and Corporate Frauds

Abstract:     
This paper identifies an important factor in assessing the likelihood of corporate wrongdoing — the connection a CEO has with her top executives developed through their appointment decisions during her tenure. A sample of publicly-listed firms over the period 1996-2006 reveals that CEO connectedness within executive suites increases the likelihood of committing frauds and decreases the likelihood of detecting frauds. We identify several channels through which CEO connectedness decreases expected costs of committing fraud — by hindering and delaying detection, by reducing the likelihood of CEO dismissal upon fraud discovery, and by lowering the coordination costs of carrying out illegal activities. Furthermore, standard monitoring mechanisms do not seem to mitigate the adverse effects on frauds, suggesting regulators, investors, and governance specialists should pay particular attention to the CEO’s influence over top executives developed through appointments decisions.

Number of Pages in PDF File: 57

Keywords: Corporate Frauds, Social Connections, Corporate Governance, CEO Influence

JEL Classification: G30, K20

working papers series