CEO Connectedness within Executive Suites and Corporate Frauds

64 Pages Posted: 14 Mar 2012

See all articles by Vikramaditya S. Khanna

Vikramaditya S. Khanna

University of Michigan Law School

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

University of Michigan, Stephen M. Ross School of Business; Tsinghua University, SEM

Date Written: March 13, 2012

Abstract

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.

Suggested Citation

Khanna, Vikramaditya S. and Kim, E. Han and Lu, Yao, CEO Connectedness within Executive Suites and Corporate Frauds (March 13, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2021059 or http://dx.doi.org/10.2139/ssrn.2021059

Vikramaditya S. Khanna

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-615-6959 (Phone)

E. Han Kim (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Yao Lu

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
7347093843 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

Tsinghua University, SEM ( email )

Wenlun Building 347#
Beijing, 100084
China
8610-62797399 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

Register to save articles to
your library

Register

Paper statistics

Downloads
61
Abstract Views
303
PlumX Metrics