Executives’ 'Off-the-Job' Behavior, Corporate Culture, and Financial Reporting Risk
Robert H. Davidson
Georgetown University - McDonough School of Business
University of Minnesota - Twin Cities - Carlson School of Management
Abbie J. Smith
University of Chicago - Booth School of Business
February 27, 2013
Chicago Booth Research Paper No. 12-24
Fama-Miller Working Paper
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.
Number of Pages in PDF File: 61
Keywords: Executive frugality, legal infractions, financial reporting risk, corporate culture.
JEL Classification: G30, G34, G38
Date posted: June 30, 2012 ; Last revised: March 3, 2014