Executives who play fast and loose with the law are also more likely to bend the rules at work. New research from Assistant Professor Aiyesha Dey found CEOs and CFOs with criminal records were more likely to perpetrate fraud in the workplace. Furthermore, executives who owned lavish luxury goods tended to breed a workplace environment where reporting errors were more likely.
Dey and her colleagues examined CEOs and CFOs who had committed criminal infractions ranging from drug offenses and domestic violence, to minor traffic violations. They found executives with criminal records were more likely to be named in instances of fraudulent reporting to the SEC. Interestingly, the law-breaking CEOs have a higher propensity to commit fraud, regardless of the severity of their past infractions.
"We have results when we look at just speeding tickets, and leave out some of the more serious charges," says Dey. "Even a minor violation gives you an effect."
The researchers also discovered that "unfrugal" CEOs and CFOs--executives who owned luxury goods like extremely expensive cars, yachts, and houses--tended to foster a culture of fraud in the workplace. Compared to their more frugal counterparts, companies led by "unfrugal" CEOs logged more erroneous and fraudulent SEC reporting errors.
"We find frugal executives certainly run a tight ship. They have more disciplined control systems and strategies in place," says Dey.
If Dey's findings are any indication, executives' personal lives could affect their stewardship of corporate resources.
"I think corporate governance boils down to personal governance," says Dey. "So instead of looking at a series of structural changes we impose on firms, let's look more closely at the person in charge and what are the qualities and characteristics the person has."
"Executives' 'Off-the-Job' Behaviors and Financial Reporting Risk" Davidson, R., Dey, A., et al., Journal of Financial Economics (in press)