CEO Connectedness within Executive Suites and Corporate Frauds
64 Pages Posted: 14 Mar 2012
Date Written: March 13, 2012
This paper identifies an important factor in assessing a firm’s likelihood of engaging in wrongdoing -- the connection between CEOs and top executives arising from executive appointments during the CEO’s tenure. Using a sample of publicly listed firms over the period 1996-2006, we find that CEO connectedness within executive suites increases the likelihood of committing frauds by helping to conceal frauds and by reducing the coordination costs of carrying out illegal activities. In addition, the impact of CEO connectedness is even stronger when the fraud involves executives taking advantage of their positions to benefit themselves as compared to when the fraud is either an accounting or operating fraud. Further, the adverse effects of CEO connectedness on frauds do not seem to be mitigated by standard monitoring mechanisms. The evidence suggests that regulators, investors, and governance specialists should pay particular attention to how closely connected CEOs are to their top executives through personnel decisions.
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