N.K. Chidambaran — The Harvard Law School Forum on Corporate Governance and Financial Regulation

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CEO-Director Connections and Corporate Fraud

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 5, 2010 at 11:15 am

Tags: Board independence, Boards of Directors, Corporate fraud, N.K. Chidambaran, Nagpurnanand Prabhala, SEC, Simi Kedia

Editor’s Note: The following post comes to us from N.K. Chidambaran of the Finance and Economics Department at Fordham University, Simi Kedia of the Finance and Economics Department at Rutgers University, and Nagpurnanand Prabhala of the Finance Department at the University of Maryland.

In the paper, CEO-Director Connections and Corporate Fraud, which was recently made publicly available on SSRN, we study the propensity of firms to commit financial fraud using a sample of SEC enforcement actions from 2000 to 2006. Controlling for year effects, Fama-French 48-industry effects, and several firm characteristics, we find a significant relation between fraud probability and CEO-board connectedness.

The nature of this relation depends on the institutional origin of the connection. While nonprofessional connectedness due to shared educational and non-business antecedents increases fraud probability, professional connections formed due to common prior employment decrease fraud. The positive effects of professional connectedness are pronounced only when individuals share prior service as executives. The impact of professional-connections persists after the 2002 Sarbanes-Oxley Act while nonprofessional connections lose significance after SOX.

…continue reading: CEO-Director Connections and Corporate Fraud

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