Director networks and misconduct

Using a large sample of U.S. public firms, our study introduces a measure of misconduct exposure, based on the interconnected professional experiences of board members with directors from firms previously engaged in misconduct. We document that a firm's inclination towards corporate misbehavior is positively associated with its proximity, particularly through past professional board connections, to firms with similar misconduct histories. These peer effects are more pronounced when the connection involves influential board members, when the misconduct is less detectable, and when the misconducting neighboring firms receive lenient penalties. Our findings are robust to controlling for varying enforcement levels and are not fully explained by the endogenous nature of firm-director relationships. Moreover, these professional network effects are distinct from the influences of local and industry norms, interlocking directorates, and geographic proximity, for which we also provide evidence.