Does Financial Misconduct Affect the Future Compensation of Alumni Managers?

By: Boris Groysberg, Eric Lin and Georgios Serafeim

Abstract

We explore how an organization’s financial misconduct may affect pay for former employees not implicated in wrongdoing. Drawing on stigma theory we hypothesize that although such alumni did not participate in the financial misconduct and they had left the organization years before the misconduct, they experience a compensation penalty. Our results support this prediction. The stigma effect increases in relation to the job function proximity to the misconduct, recency of the misconduct, and an employee’s seniority. Collectively, our results suggest that the stigma of financial misconduct could reach alumni employees and need not be confined to executives and directors that oversaw the organization during the misconduct.