Why Do Corporations Become Criminals? Ownership, Hidden Actions, and Crime as an Agency Cost

37 Pages Posted: 16 Jun 1997 Last revised: 19 Nov 2012

Cindy R. Alexander

Securities and Exchange Commission (SEC)

Mark A. Cohen

Vanderbilt University - Strategy and Business Economics; Vanderbilt University - Law School; Resources for the Future

Abstract

We examine the relationship between ownership structure and corporate crime. Our approach draws upon two lines of research: (1) the theory of the firm which poses ownership as a critical incentive mechanism and (2) the economic theory of corporate crime, which emphasizes the role played by top management in affecting crime in the corporation. We find that crime occurs less frequently among firms in which management has a larger ownership stake. Our results imply that penalizing "corporations" (shareholders) deters crime, and that corporate crime tends not to benefit shareholders, ex ante. Rather than being something shareholders have encouraged, corporate crime appears to reflect an agency cost limited but not optimally eliminated through the costly efforts of top management. The evidence is consistent with the notion that ownership structure plays an important role in aligning the hidden actions of top management with the shareholder interest.

JEL Classification: G32, G38, K14, K22

Suggested Citation

Alexander, Cindy R. and Cohen, Mark A., Why Do Corporations Become Criminals? Ownership, Hidden Actions, and Crime as an Agency Cost. Journal of Corporate Finance, Vol. 5, 1999. Available at SSRN: https://ssrn.com/abstract=10474

Cindy R. Alexander (Contact Author)

Securities and Exchange Commission (SEC)

Washington
United States

Mark A. Cohen

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States
615-322-0533 (Phone)

HOME PAGE: http://https://business.vanderbilt.edu/bio/mark-cohen/

Vanderbilt University - Law School

131 21st Avenue South
Nashville, TN 37203-1181
United States

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5000 (Phone)

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