Is Fraud Contagious? Co-Worker Influence on Misconduct by Financial Advisors

Abstract

Using a novel data set of U.S. financial advisors that includes individuals' employment histories and misconduct records, we show that co-workers influence an individual's propensity to commit financial misconduct. We identify co-workers' effect on misconduct using changes in co-workers caused by mergers of financial advisory firms. The tests include merger-firm fixed effects to exploit the variation in changes to co-workers across branches of the same firm. The probability of an advisor committing misconduct increases if his new co-workers, encountered in the merger, have a history of misconduct. This effect is stronger between demographically similar co-workers.

Keywords: Financial advisors, Financial misconduct, Fraud, Social networks, Peer effects, Career networks

JEL Classification: D18, G20, G24, G28, K22