Management Turnover and Corporate Governance Changes Following the Revelation of Fraud
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
Journal of Law and Economics, April 1999
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.
Note: Correction: This reprinted abstract corrects the affiliation for co-author Anup Agrawal.
Date posted: December 2, 1998