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Executives’ 'Off-the-Job' Behavior, Corporate Culture, and Financial Reporting Risk

61 Pages Posted: 30 Jun 2012 Last revised: 3 Mar 2014

Robert H. Davidson

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems

Aiyesha Dey

University of Minnesota - Twin Cities - Carlson School of Management

Abbie J. Smith

University of Chicago - Booth School of Business

Date Written: February 27, 2013

Abstract

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

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

Robert H. Davidson

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Aiyesha Dey

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
6126268626 (Phone)

Abbie J. Smith (Contact Author)

University of Chicago - Booth School of Business ( email )

1101 East 58th Street
Graduate School of Business
Chicago, IL 60637-1561
United States
773-702-7295 (Phone)
773-702-0458 (Fax)

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