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Unethical Culture, Suspect CEOs and Corporate Misbehavior

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  • Lee Biggerstaff
  • David C. Cicero
  • Andy Puckett
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    Abstract

    We show that firms with CEOs who personally benefitted from options backdating were more likely to engage in other forms of corporate misbehavior, suggestive of an unethical corporate culture. These firms were more likely to overstate firm profitability and to engage in less profitable acquisition strategies. The increased level of corporate misbehaviors is concentrated in firms with suspect CEOs who were outside hires, consistent with adverse selection in the market for chief executives. Difference-in-differences tests confirm that the propensity to engage in these activities is significantly increased following the arrival of an outside-hire ‘suspect’ CEO, suggesting that causation flows from the top executives to the firm. Finally, while these suspect CEOs appear to have avoided market discipline when the market was optimistic, they were more likely to lose their jobs and their firms were more likely to experience dramatic declines in value during the ensuing market correction.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19261.

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    Date of creation: Aug 2013
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    Handle: RePEc:nbr:nberwo:19261

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