How Are Non-Financial and Financial Misconduct Related?

Abstract

I examine the relation between firms' non-financial and financial misconduct. Using novel data on federal violations, I show that this relation varies by both the timing and type of non-financial violation. Financial misconduct is concurrent with illegal underpayment of employees' wages and precedes environmental violations, but does not appear to be concurrent with, precede, or be preceded by other types of non-financial misconduct. Non-financial misconduct is more indicative of financial misconduct in industries where a violation has higher signaling value and when governance worsens. Finally, firms under pressure to meet or beat earnings expectations commit both worker safety- and wage-related violations more frequently. My results highlight (i) that short-term and long-term incentives factor into not just whether firms engage in misconduct but how they choose to do so; and, hence, (ii) that the dynamics of real vs. accrual earnings management do not necessarily generalize to the case of outright misconduct.