CEO Connectedness and Corporate Frauds

59 Pages Posted: 10 Sep 2013 Last revised: 29 May 2015

Vikramaditya S. Khanna

University of Michigan Law School

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

Tsinghua University - School of Economics & Management

Date Written: July 2, 2014

Abstract

We find connections CEOs develop with top executives and directors through their appointment decisions heighten the risk of corporate fraud. Appointment-based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases expected costs of fraud by helping to conceal frauds, making CEO dismissal less likely upon fraud discovery, and lowering the coordination costs of carrying out illegal activities. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on frauds. Appointment-based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.

Keywords: Corporate Frauds, Appointment-based CEO Connections, Corporate Governance, Social Connections, CEO Power, CEO Influence

JEL Classification: G30, K20

Suggested Citation

Khanna, Vikramaditya S. and Kim, E. Han and Lu, Yao, CEO Connectedness and Corporate Frauds (July 2, 2014). 7th Annual Conference on Empirical Legal Studies Paper; Journal of Finance, Forthcoming; 7th Annual Conference on Empirical Legal Studies Paper; Ross School of Business Paper No. 1209; U of Michigan Public Law Research Paper No. 283. Available at SSRN: https://ssrn.com/abstract=2323251 or http://dx.doi.org/10.2139/ssrn.2323251

Vikramaditya S. Khanna

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-615-6959 (Phone)

E. Han Kim (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Yao Lu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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