"CEO Connectedness and Corporate Frauds"

Michigan Law Authors
Areas of Interest
Publish Date
2015
Publication
The Journal of Finance
Publication Type
Journal Article
Abstract

We find that connections CEOs develop with top executives and directors throughtheir appointment decisions increase the risk of corporate fraud. Appointment-basedCEO connectedness in executive suites and boardrooms increases the likelihoodof committing fraud and decreases the likelihood of detection. Additionally, it de-creases the expected costs of fraud by helping conceal fraudulent activity, makingCEO dismissal less likely upon discovery, and lowering the coordination costs ofcarrying out illegal activity. Connections based on network ties through past employ-ment, education, or social organization memberships have insignificant effects onfraud. Appointment-based CEO connectedness warrants attention from regulators,investors, and corporate governance specialists.

Full Text