Management Turnover and Corporate Governance Changes Following the Revelation of Fraud

Posted: 2 Dec 1998  

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration

Jeffrey F. Jaffe

University of Pennsylvania - Finance Department

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

Abstract

Anecdotal evidence suggests that top managers of firms that are investigated for fraud lose their jobs. Fraud scandals plausibly create incentives to change managers, in an attempt to improve the firm's performance, recover lost reputational capital, or limit the firm's exposure to liabilities that arise from the fraud. It also is possible that fraud creates incentives to change the composition of the firm's board, to improve the external monitoring of managers or to rent new directors' valuable reputational or political capital.

Despite such claims, we find little systematic evidence that firms suspected or charged with fraud have unusually high turnover among senior managers or directors. In univariate comparisons, there is some evidence that firms committing fraud have higher managerial and director turnover. But in multivariate tests that control for other firm attributes, such evidence disappears. These findings indicate that the revelation of fraud does not, in general, increase the net benefits to changing managers or the firm's leadership structure.

Notes: Correction: This reprinted abstract corrects the affiliation for co-author Anup Agrawal.

Suggested Citation

Agrawal, Anup and Jaffe, Jeffrey F. and Karpoff, Jonathan M., Management Turnover and Corporate Governance Changes Following the Revelation of Fraud. Journal of Law and Economics, April 1999. Available at SSRN: https://ssrn.com/abstract=138911

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Commerce
EFLS, Box 870224
Tuscaloosa, AL 35487-0224
United States
205-348-8970 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://culverhouse.ua.edu/faculty/profile/4

Jeffrey F. Jaffe

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-5615 (Phone)
215-898-6200 (Fax)

Jonathan M. Karpoff (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

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