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The Consequences of Managerial Indiscretions: Sex, Lies, and Firm Value

72 Pages Posted: 17 Mar 2010 Last revised: 30 Nov 2016

Brandon N. Cline

Mississippi State University

Ralph A. Walkling

Drexel University - Lebow College of Business

Adam S. Yore

University of Missouri at Columbia - Department of Finance

Date Written: November 16, 2016

Abstract

Personal managerial indiscretions are separate from a firm’s business activities but provide information about the manager’s integrity. Consequently, they could affect counterparties’ trust in the firm and the firm’s value and operations. We find that companies of accused executives experience significant wealth deterioration, reduced operating margins, and lost business partners. Indiscretions are also associated with an increased probability of unrelated shareholder-initiated lawsuits, DOJ/SEC investigations, and managed earnings. Further, CEOs and boards face labor market consequences, including forced turnover, pay cuts, and lower shareholder votes at re-election. Indiscretions occur more often at poorly governed firms where disciplinary turnover is less likely.

Keywords: managerial indiscretions, management quality, integrity, class action lawsuits, fraud, earnings management, corporate governance, managerial labor markets, director elections, CEO turnover, poor monitoring index

JEL Classification: G34, G39, K42

Suggested Citation

Cline, Brandon N. and Walkling, Ralph A. and Yore, Adam S., The Consequences of Managerial Indiscretions: Sex, Lies, and Firm Value (November 16, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1573327 or http://dx.doi.org/10.2139/ssrn.1573327

Brandon N. Cline

Mississippi State University ( email )

Mississippi State, MS 39762
United States
662.325.7477 (Phone)
662.325.1977 (Fax)

Ralph August Walkling

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

Adam S. Yore (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

403 Cornell Hall
Columbia, MO 65211
United States
573-884-1446 (Phone)

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