Misconduct Synergies

Abstract

Do corporate control transactions discipline the labor force?  We use the investment advisory industry as a laboratory to test for evidence of improvements in employee misconduct following M&A events ("misconduct synergies").  Consistent with synergies, we find that new disclosures of employee misconduct in the combined firm drop by between 25 and 34 percent following mergers.  However, contrary to the idea that better-performing firms tend to purchase poor-performing ones, we find that both targets and acquirers have better misconduct records than the industry's average firm. Moreover, we find evidence of assortative matching on misconduct, where low (high) misconduct acquirers tend to purchase low (high) misconduct targets. This suggests complementarities, where target and acquirer mechanisms for monitoring and disciplining employees are more effective when used together, consistent with Rhodes-Kropf and Robinson (2008). Indeed, target and acquiring firm employees have similar pre-merger misconduct records on average, but the sensitivity of employment separation to misconduct increases post-merger, suggesting improved disciplinary mechanisms.

Keywords: Investment Advisers, M&A, Synergies, Broker Misconduct, BrokerCheck

JEL Classification: G24, G30, G34, M14