CEO Behavioral Integrity, Auditor Responses, and Firm Outcomes

50 Pages Posted: 18 Aug 2012 Last revised: 1 Jun 2018

Shane S. Dikolli

Duke University - Fuqua School of Business

Thomas Keusch

INSEAD

William J. Mayew

Duke University - Fuqua School of Business

Thomas D. Steffen

Yale University School of Management

Date Written: May 26, 2018

Abstract

We examine the auditor response to CEO integrity. We apply behavioral integrity (BI) theory (Simons 2002), which is based upon word-deed congruence, to conceptualize a large-scale measure. Low word-deed congruence should result in more explanations when communicating, and so we use computational linguistics to measure CEO explanations provided in more than 30,000 shareholder letters. Variation in explanations beyond firm fundamentals and CEO-specific characteristics serve as our linguistic-based proxy for CEO BI. We find audit fees increase as BI decreases, but BI is not associated with financial misstatement or litigation. These findings are consistent with auditors undertaking additional work in response to low BI which in turn prevents restatements and lawsuits. The likelihood of option backdating increases as BI decreases, consistent with the contention that auditors had little incentive to prevent backdating. Finally, BI is increasing in future performance, which suggests CEOs partially underpin the returns to high-integrity corporate cultures.

Keywords: CEO behavioral integrity; audit fees; financial misreporting; corporate culture

JEL Classification: J24, L25, M14, M41, M42

Suggested Citation

Dikolli, Shane S. and Keusch, Thomas and Mayew, William J. and Steffen, Thomas D., CEO Behavioral Integrity, Auditor Responses, and Firm Outcomes (May 26, 2018). Available at SSRN: https://ssrn.com/abstract=2131476 or http://dx.doi.org/10.2139/ssrn.2131476

Shane Sami Dikolli (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-1949 (Phone)
919-869-1901 (Fax)

Thomas Keusch

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Thomas D. Steffen

Yale University School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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