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CEO-Director Connections and Corporate Fraud

50 Pages Posted: 16 Mar 2012  

N.K. Chidambaran

Gabelli School of Business, Fordham University

Simi Kedia

Rutgers Business School

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business

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Date Written: March 15, 2012

Abstract

We study the relation between fraud and CEO-board connectedness. While nonprofessional connections due to shared non-business service or alma mater increase fraud probability, professional connections from employment overlaps lower the incidence of fraud. The benefits of professional connectedness are pronounced when individuals share service as executives rather than as directors or as director and executive. The results are robust to firm-specific controls, industry and time period controls, coopted directors, and measures of director quality and heterogeneity. While frauds have led regulators to (successfully) push for independent directors, our results suggest that independence is only necessary, not sufficient. Heterogeneity within the set of independent directors seems to be at least as important as independence per se.

Keywords: corporate fraud, professional connections, non-professional connections, board independence, education connections, social ties, SOX effects

JEL Classification: G30, G32, G34, G38

Suggested Citation

Chidambaran, N.K. and Kedia, Simi and Prabhala, Nagpurnanand, CEO-Director Connections and Corporate Fraud (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2023030 or http://dx.doi.org/10.2139/ssrn.2023030

N.K. Chidambaran (Contact Author)

Gabelli School of Business, Fordham University ( email )

United States

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business ( email )

4427 Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2165 (Phone)
301-405-0359 (Fax)

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