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

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