Out of Site, Out of Mind? The Role of the Government-Appointed Corporate Monitor

97 Pages Posted: 8 Feb 2022 Last revised: 2 May 2023

See all articles by Lindsey A. Gallo

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business

Kendall Lynch

University of Washington - Michael G. Foster School of Business

Rimmy E. Tomy

University of Chicago

Date Written: May 1, 2023

Abstract

We study the role of a relatively new type of external firm monitor, an on-site government-appointed Corporate Monitor, and assess whether such appointments reduce firms’ propensity to violate laws. Using a sample of deferred and non-prosecution agreements, we first document the determinants of Monitor-appointment. We find firms that voluntarily disclose wrongdoing and have more independent directors are less likely to have Corporate Monitors, whereas those with more severe infractions, mandated board changes, and increased cooperation requirements are more likely to have Monitors. We find such appointments are associated with an 18%–25% reduction in violations while the Monitor is on site, however, the effect does not persist after the Monitorship ends. Using a semi-supervised machine learning method to measure changes in firms’ ethics and compliance norms, we find that the reduction in violations is associated with changes in ethics and compliance that also do not persist. Finally, we document that firms under Monitorship experience a persistent reduction in innovation, highlighting a previously unexplored cost of these interventions. Overall, our results suggest that, although Corporate Monitors on site are associated with fewer violations, firms revert to previous levels of violations following Monitors’ departure.

Keywords: Corporate Governance, Corporate Monitor, Corporate Recidivism, Enforcement, Regulation

JEL Classification: G30, G34, G38

Suggested Citation

Gallo, Lindsey A. and Lynch, Kendall and Tomy, Rimmy, Out of Site, Out of Mind? The Role of the Government-Appointed Corporate Monitor (May 1, 2023). Chicago Booth Research Paper No. 22-07, Available at SSRN: https://ssrn.com/abstract=4027017 or http://dx.doi.org/10.2139/ssrn.4027017

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
7347648243 (Phone)

Kendall Lynch

University of Washington - Michael G. Foster School of Business ( email )

Seattle, WA 98195
United States

Rimmy Tomy (Contact Author)

University of Chicago ( email )

Booth School of Business
5807 S Woodlawn Ave
Chicago, IL 60637
United States

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