Download this Paper Open PDF in Browser

Corporate Governance Spillovers

54 Pages Posted: 12 Nov 2008 Last revised: 12 Apr 2011

Ing-Haw Cheng

Tuck School of Business at Dartmouth

Date Written: April 10, 2011

Abstract

Failures of corporate governance at one firm spill over into short-termism and incentives for managers at other firms to manipulate earnings fraudulently due to career concerns and relative performance evaluation. The model predicts that (i) peer governance matters and that the average rate of earnings fraud should be higher when peer governance is weaker; (ii) managers should react more aggressively to changes in relative performance when peer governance is weaker; and (iii) earnings fraud should be most sensitive to peer governance when career concerns are strong. Using data on event-periods associated with fraudulent restatements, I find evidence corroborating all three predictions and the implication that a few "bad apples" can lead to increased misbehavior at other firms. By studying a specific managerial action, the paper highlights the importance of the role of career concerns and implicit incentives as well as the governance environment in influencing managerial behavior.

Keywords: corporate governance, spillovers, earnings fraud, peer effects, career concerns

JEL Classification: G30, G34

Suggested Citation

Cheng, Ing-Haw, Corporate Governance Spillovers (April 10, 2011). Available at SSRN: https://ssrn.com/abstract=1299652 or http://dx.doi.org/10.2139/ssrn.1299652

Ing-Haw Cheng (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

Paper statistics

Downloads
355
Rank
69,110
Abstract Views
1,671