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Executives' “off-the-job” behavior, corporate culture, and financial reporting risk

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  • Davidson, Robert
  • Dey, Aiyesha
  • Smith, Abbie

Abstract

We examine how executives' behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”) and prior legal infractions, is related to financial reporting risk. We predict and find that chief executive officers (CEOs) and chief financial officers (CFOs) with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives' frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high and increasing probabilities of other insiders perpetrating fraud and unintentional material reporting errors during their tenure. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs' reigns, including the appointment of an unfrugal CFO, an increase in executives' equity-based incentives to misreport, and a decline in measures of board monitoring intensity.

Suggested Citation

  • Davidson, Robert & Dey, Aiyesha & Smith, Abbie, 2015. "Executives' “off-the-job” behavior, corporate culture, and financial reporting risk," Journal of Financial Economics, Elsevier, vol. 117(1), pages 5-28.
  • Handle: RePEc:eee:jfinec:v:117:y:2015:i:1:p:5-28
    DOI: 10.1016/j.jfineco.2013.07.004
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    Cited by:

    1. repec:eee:jfinec:v:127:y:2018:i:2:p:389-415 is not listed on IDEAS
    2. Sunder, Jayanthi & Sunder, Shyam V. & Zhang, Jingjing, 2017. "Pilot CEOs and corporate innovation," Journal of Financial Economics, Elsevier, vol. 123(1), pages 209-224.
    3. repec:eee:jfinec:v:126:y:2017:i:3:p:490-515 is not listed on IDEAS
    4. repec:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-017-9435-x is not listed on IDEAS
    5. repec:eee:joacli:v:37:y:2016:i:c:p:55-75 is not listed on IDEAS
    6. repec:bla:stratm:v:38:y:2017:i:13:p:2623-2646 is not listed on IDEAS
    7. repec:eee:corfin:v:45:y:2017:i:c:p:31-63 is not listed on IDEAS
    8. repec:pjm:journl:v:xxiii:y:2018:i:1:p:3-24 is not listed on IDEAS
    9. Pietro A. Bianchi & Antonio Marra & Donato Masciandaro & Nicola Pecchiari, 2017. "Is It Worth Having the Sopranos on Board? Corporate Governance Pollution and Organized Crime: The Case of Italy," BAFFI CAREFIN Working Papers 1759, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

    More about this item

    Keywords

    Executive frugality; Legal infractions; Financial reporting risk; Corporate culture;

    JEL classification:

    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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