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
Date Written: May 1, 2023
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: Suggested Citation