61 Pages Posted: 30 Jun 2012 Last revised: 3 Mar 2014
Date Written: February 27, 2013
We examine how executives’ behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”) and prior legal infractions, is related to financial reporting risk. We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high and increasing probabilities of other insiders perpetrating fraud and unintentional material reporting errors during their tenure. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.
Keywords: Executive frugality, legal infractions, financial reporting risk, corporate culture.
JEL Classification: G30, G34, G38
Suggested Citation: Suggested Citation
Davidson, Robert H. and Dey, Aiyesha and Smith, Abbie J., Executives’ 'Off-the-Job' Behavior, Corporate Culture, and Financial Reporting Risk (February 27, 2013). Chicago Booth Research Paper No. 12-24; Fama-Miller Working Paper . Available at SSRN: https://ssrn.com/abstract=2096226 or http://dx.doi.org/10.2139/ssrn.2096226