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  • July 2015
  • Article
  • Journal of Financial Economics

Executives' 'Off-the-Job' Behaviors and Financial Reporting Risk

By: Robert Davidson, Aiyesha Dey and Abbie Smith
  • Format:Print
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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.

Keywords

Management Teams; Behavior; Personal Characteristics; Crime and Corruption; Governance Compliance; Financial Reporting; Organizational Culture

Citation

Davidson, Robert, Aiyesha Dey, and Abbie Smith. "Executives' 'Off-the-Job' Behaviors and Financial Reporting Risk." Journal of Financial Economics 117, no. 1 (July 2015): 5–28.
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About The Author

Aiyesha Dey

Accounting and Management
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  • Bear to Bull? An Analyst’s Journey with Netflix By: Aiyesha Dey and Joseph Pacelli
  • Ginkgo Bioworks vs. Scorpion Capital: The Debate Over Related-Party Revenues By: Jonas Heese, Aiyesha Dey and Suraj Srinivasan
  • Understanding The Value of DEI Programs: Perspectives from Corporate Leadership By: Aiyesha Dey, Kristina M. Rennekamp and Joseph Pacelli
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