Why Do Professional Managers Collude in Corporate Crimes? New Evidence from the Dark Side of Family Controlled Firms

Abstract

This paper investigates the relationship between family firm, internal and external governance, and corporate fraud. We focus on judicial and market attitudes toward professional top managers, not controlling shareholders, involved in corporate fraud in family controlled firms in Korea. We find that top managers receive lighter sentences. The probability that a professional manager goes to prison is 35.7%p less than that of a controlling shareholder. Moreover, no top management has ever gone to prison at an appellate court. Secondly, almost 55% of professional top managers involved in corporate crimes come back to the position in the near future after sentencing decisions. Almost 84% of resurrected professional managers in the market had worked for family controlled business groups, chaebol-affiliated firms at the moment of their corporate crimes. More surprisingly, 87% of returning chaebol managers take the executive position at an affiliated firm. In sum, we provide evidence for “the economics of crime” by showing the costs of criminal conspiracy. Our findings suggest the possibility that an ill-functioning legal system and market for professional managers lowers the costs of crime incurred by a professional manager going to prison, losing a reputation, and losing a job in the future.

Keywords: Family Firm, Controlling Shareholder, Professional Manager, Corporate Crime, Tunneling, Judicial System, Internal Labor Market

JEL Classification: G30, K40