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Do Heads Roll? An Empirical Analysis of CEO Turnover and Pay When the Corporation is Federally Prosecuted

35 Pages Posted: 11 May 2017 Last revised: 13 Jun 2017

Brandon L. Garrett

University of Virginia School of Law

Nan Li

Columbia University - Columbia Business School

Shivaram Rajgopal

Columbia Business School

Date Written: May 11, 2017

Abstract

Does the criminal prosecution of a corporation affect the CEO? Or do criminal actions directed at the organization itself pose few consequences for the individuals at the top, and the CEO in particular? While CEO’s are rarely themselves prosecuted, organizations could discipline CEO’s through paycuts or outright replacing the CEO in response to a criminal prosecution. We sought to examine whether and how that occurs. We focus our analysis on a dataset of public companies that settled criminal cases brought by federal prosecutors from 2001-2015. We compared those companies to the larger set of companies in the Execucomp database of S&P 1500 firms, focusing on CEO compensation and turnover during the same time period. We examined the time period before and after prosecution, and the year that the company resolved the criminal charges against the company. We found that in the year that the company settled its prosecution, through a guilty plea or a deferred or non-prosecution agreement, there was a significantly higher level of CEO turnover. However, there was little evidence of any CEO pay cut. Second, for the prosecuted firms that did not have CEO turnover after prosecution, there is little evidence of a reduction in compensation. Indeed, we observed a spike in CEO bonuses in the year of prosecution—confirming concerns expressed by judges, prosecutors, lawmakers, and academics that corporate prosecutions do not sufficiently impact high-level decision-makers like CEOs. For the prosecuted firms that did have CEO turnover after prosecution, there is some evidence of a pay cut, both to salary and bonus, prior to the replacement of the CEO. These results raise larger questions whether federal prosecutors targeting the most serious corporate crimes sufficiently incentivize accountability at the top.

Suggested Citation

Garrett, Brandon L. and Li, Nan and Rajgopal, Shivaram, Do Heads Roll? An Empirical Analysis of CEO Turnover and Pay When the Corporation is Federally Prosecuted (May 11, 2017). Virginia Law and Economics Research Paper No. 2017-11; Columbia Business School Research Paper No. 17-54. Available at SSRN: https://ssrn.com/abstract=2966823

Brandon L. Garrett (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Nan Li

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Shivaram Rajgopal

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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