Once Bitten, Twice Shy: Learning From Corporate Fraud and Corporate Governance Spillovers

63 Pages Posted: 22 Jun 2021 Last revised: 12 Nov 2022

See all articles by Trung Nguyen

Trung Nguyen

Harvard University - Business School (HBS)

Date Written: October 31, 2022

Abstract

This paper finds that investors learn from their experience with corporate fraud and financial misconduct and modify their investment behavior to avoid suspicious firms and increase corporate governance efforts. More specifically, mutual funds that experienced corporate fraud at one of their portfolio firms subsequently chose firms with lower probabilities of fraud and financial misconduct, compared to otherwise similar funds that did not experience any corporate malfeasance incidents. Furthermore, mutual funds that experienced corporate fraud intensify their corporate governance activities and vote significantly more against management at other firms in their portfolios, compared to the voting behavior at the same firms by otherwise similar funds but that did not experience any fraud, especially on issues related to director election, audit, and financial statement. I find that fraud-experienced investors are significantly less likely to vote for problematic directors. Finally, I find that firms held by more fraud-experienced investors observe a significant drop in the propensity to get an accounting fraud sanction in subsequent years. Taken together, my results show that learning and experience play a critical role in corporate governance spillovers, fraud detection, and deterrence.

Keywords: institutional investors; investor experience; shareholder voting; corporate governance; corporate fraud; board of directors

JEL Classification: G23; G34; G41; K42

Suggested Citation

Nguyen, Trung, Once Bitten, Twice Shy: Learning From Corporate Fraud and Corporate Governance Spillovers (October 31, 2022). Available at SSRN: https://ssrn.com/abstract=3866082 or http://dx.doi.org/10.2139/ssrn.3866082

Trung Nguyen (Contact Author)

Harvard University - Business School (HBS) ( email )

15 Harvard Way
Morgan 377
Boston, MA 02163
United States

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