Corporate Governance Spillovers

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

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

University of Toronto - Rotman School of Management

Date Written: April 10, 2011


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: or

Ing-Haw Cheng (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4


Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics