Jumping Ship: Undisclosed SEC Investigations and CEO Turnover

Abstract

Prior research indicates that public misconduct revelations can severely impact managers' careers. We use the private nature of SEC investigations to explore whether managers can avoid these penalties by departing before accusations become public. We find that CEO turnover increases when the public is unaware of an SEC investigation. Specifically, for investigations that are eventually publicly disclosed, CEOs are more likely to depart in the months preceding that public revelation. Similarly, for investigations that are never disclosed, CEO exits increase shortly after the investigation's initiation. Importantly, we find no difference in future rehire rates for CEOs who exit from firms where investigations are not yet disclosed or were never disclosed compared to peers at non-investigated firms. This suggests managers strategically "jump ship" to mitigate career damage from undisclosed regulatory pressure.

Keywords: SEC Investigations, CEO Turnover, CEO Reputation

JEL Classification: G18, J24, K22, M41