Do Misstated Financial Statements Cause CEOs To Speed?

Should companies look into the driving records of the CEOs that they hire?   Robert H. Davidson, Aiyesha Dey, and Abbie Smith answer that question in a forthcoming Journal of Economics paper.  These authors examined a sample of SEC Accounting and Auditing Enforcement Releases and data on executive legal infractions from federal, state and county databases.  Infractions include a gamut of misdeeds, including speeding tickets.  After slicing and dicing the data, the authors conclude that CEOs and CFOs with prior legal infractions have “a relatively high propensity to perpetrate fraud (i.e., named in the fraud) . . .”.  .  The authors interpret a CEO’s prior record as “a symptom of a relatively low regard for laws and a lack of self-control”.

And That One Talent, Which Is Death To Hide

Superficially, this seems unsurprising – criminals can be expected to commit crimes.  However, correlation is not causation.  More importantly, not everyone who does 70 when the speed limit is 65 is racing to cook the books.  The authors also make no attempt to correlate risky behaviors with success.  After all, firms don’t hire CEOs to bury the stockholders’ talents in the ground.  Returns require risk and risk takers.

Would You Want Cato The Younger As Your CEO?

These authors also studied CEO ownership of luxury goods, which they interpret as a symptom of low frugality.  Interestingly, the authors found that unfrugal CEOs are not more likely than frugal CEOs to be named in fraud.  However, they found significantly increased risks of fraudulent corporate reporting, that other insiders would be named in fraud, and financial restatements.

 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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