IDEAS home Printed from https://ideas.repec.org/a/eee/jobhdp/v166y2021icp194-203.html
   My bibliography  Save this article

Repeated engagement in misconduct by executives involved with financial restatements

Author

Listed:
  • Khanna, Poonam
  • Khan, Sarfraz A.
  • Krasikova, Dina
  • Miller, Stewart R.

Abstract

Recidivism, or repeated engagement in misconduct despite being sanctioned, among top executives has received limited attention in the literature on organizational misconduct. Based on insights from fairness theory, supplemented by insights from attribution theory, we argue that the likelihood of an executive recidivating is associated with the perceived fairness of the sanctions he/she faces following the initial misconduct. We examine one consequence of a common managerial labor market sanction – lower compensation – on the likelihood of recidivism.Using a sample of Chief Financial Officers (CFOs) who left their positions following financial misconduct at their firms and subsequently migrated to another public firm in the same capacity, we test and find support for our prediction. A number of robustness and endogeneity tests add support to our recidivism model.

Suggested Citation

  • Khanna, Poonam & Khan, Sarfraz A. & Krasikova, Dina & Miller, Stewart R., 2021. "Repeated engagement in misconduct by executives involved with financial restatements," Organizational Behavior and Human Decision Processes, Elsevier, vol. 166(C), pages 194-203.
    • Handle: RePEc:eee:jobhdp:v:166:y:2021:i:c:p:194-203
    DOI: 10.1016/j.obhdp.2020.08.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0749597820303733
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.obhdp.2020.08.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jean C. Bedard & Rani Hoitash & Udi Hoitash, 2014. "Chief Financial Officers as Inside Directors," Contemporary Accounting Research, John Wiley & Sons, vol. 31(3), pages 787-817, September.
    2. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    3. Jonathan M. Karpoff & Xiaoxia Lou, 2010. "Short Sellers and Financial Misconduct," Journal of Finance, American Finance Association, vol. 65(5), pages 1879-1913, October.
    4. Cynthia E. Devers & Todd Dewett & Yuri Mishina & Carrie A. Belsito, 2009. "A General Theory of Organizational Stigma," Organization Science, INFORMS, vol. 20(1), pages 154-171, February.
    5. Paul Harvey & Mark J. Martinko & Nancy Borkowski, 2017. "Justifying Deviant Behavior: The Role of Attributions and Moral Emotions," Journal of Business Ethics, Springer, vol. 141(4), pages 779-795, April.
    6. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    7. Roman Lanis & Grant Richardson & Grantley Taylor, 2017. "Board of Director Gender and Corporate Tax Aggressiveness: An Empirical Analysis," Journal of Business Ethics, Springer, vol. 144(3), pages 577-596, September.
    8. Dan Dhaliwal & Vic Naiker & Farshid Navissi, 2010. "The Association Between Accruals Quality and the Characteristics of Accounting Experts and Mix of Expertise on Audit Committees," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 787-827, September.
    9. Coricelli, Giorgio & Rusconi, Elena & Villeval, Marie Claire, 2014. "Tax evasion and emotions: An empirical test of re-integrative shaming theory," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 49-61.
    10. Friedman, Henry L., 2014. "Implications of power: When the CEO can pressure the CFO to bias reports," Journal of Accounting and Economics, Elsevier, vol. 58(1), pages 117-141.
    11. Agrawal, Anup & Jaffe, Jeffrey F & Karpoff, Jonathan M, 1999. "Management Turnover and Governance Changes following the Revelation of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 309-342, April.
    12. DeAngelo, Linda Elizabeth, 1988. "Managerial competition, information costs, and corporate governance : The use of accounting performance measures in proxy contests," Journal of Accounting and Economics, Elsevier, vol. 10(1), pages 3-36, January.
    13. Gino, Francesca & Pierce, Lamar, 2009. "The abundance effect: Unethical behavior in the presence of wealth," Organizational Behavior and Human Decision Processes, Elsevier, vol. 109(2), pages 142-155, July.
    14. Bebchuk, Lucian A. & Cremers, K.J. Martijn & Peyer, Urs C., 2011. "The CEO pay slice," Journal of Financial Economics, Elsevier, vol. 102(1), pages 199-221, October.
    15. Efendi, Jap & Srivastava, Anup & Swanson, Edward P., 2007. "Why do corporate managers misstate financial statements? The role of option compensation and other factors," Journal of Financial Economics, Elsevier, vol. 85(3), pages 667-708, September.
    16. (Xuefeng) Jiang, John & Petroni, Kathy R. & Yanyan Wang, Isabel, 2010. "CFOs and CEOs: Who have the most influence on earnings management?," Journal of Financial Economics, Elsevier, vol. 96(3), pages 513-526, June.
    17. Nicole Andreoli & Joel Lefkowitz, 2009. "Individual and Organizational Antecedents of Misconduct in Organizations," Journal of Business Ethics, Springer, vol. 85(3), pages 309-332, March.
    18. Ian Larkin & Lamar Pierce & Francesca Gino, 2012. "The psychological costs of pay‐for‐performance: Implications for the strategic compensation of employees," Strategic Management Journal, Wiley Blackwell, vol. 33(10), pages 1194-1214, October.
    19. Palmrose, Zoe-Vonna & Richardson, Vernon J. & Scholz, Susan, 2004. "Determinants of market reactions to restatement announcements," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 59-89, February.
    20. Jared Harris & Philip Bromiley, 2007. "Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation," Organization Science, INFORMS, vol. 18(3), pages 350-367, June.
    21. Taxman, Faye S. & Piquero, Alex, 1998. "On preventing drunk driving recidivism: an examination of rehabilitation and punishment approaches," Journal of Criminal Justice, Elsevier, vol. 26(2), pages 129-143, March.
    22. Pepper, Alexander & Gore, Julie, 2015. "Behavioral agency theory: new foundations for theorizing about executive compensation," LSE Research Online Documents on Economics 47569, London School of Economics and Political Science, LSE Library.
    23. Karpoff, Jonathan M & Lott, John R, Jr, 1993. "The Reputational Penalty Firms Bear from Committing Criminal Fraud," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 757-802, October.
    24. Bewley, Truman F., 1998. "Why not cut pay?," European Economic Review, Elsevier, vol. 42(3-5), pages 459-490, May.
    25. Daniel S. Nagin & James B. Rebitzer & Seth Sanders & Lowell J. Taylor, 2002. "Monitoring, Motivation, and Management: The Determinants of Opportunistic Behavior in a Field Experiment," American Economic Review, American Economic Association, vol. 92(4), pages 850-873, September.
    26. Benjamin Edelman & Ian Larkin, 2015. "Social Comparisons and Deception Across Workplace Hierarchies: Field and Experimental Evidence," Organization Science, INFORMS, vol. 26(1), pages 78-98, February.
    27. Greenberg, Jerald, 1993. "Stealing in the Name of Justice: Informational and Interpersonal Moderators of Theft Reactions to Underpayment Inequity," Organizational Behavior and Human Decision Processes, Elsevier, vol. 54(1), pages 81-103, February.
    28. Matthew Semadeni & Albert A. Cannella Jr. & Donald R. Fraser & D. Scott Lee, 2008. "Fight or flight: managing stigma in executive careers," Strategic Management Journal, Wiley Blackwell, vol. 29(5), pages 557-567, May.
    29. Michael D. Pfarrer & Ken G. Smith & Kathryn M. Bartol & Dmitry M. Khanin & Xiaomeng Zhang, 2008. "Coming Forward: The Effects of Social and Regulatory Forces on the Voluntary Restatement of Earnings Subsequent to Wrongdoing," Organization Science, INFORMS, vol. 19(3), pages 386-403, June.
    30. Armstrong, Christopher S. & Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2013. "The relation between equity incentives and misreporting: The role of risk-taking incentives," Journal of Financial Economics, Elsevier, vol. 109(2), pages 327-350.
    31. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    32. Agrawal, Anup & Chadha, Sahiba, 2005. "Corporate Governance and Accounting Scandals," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 371-406, October.
    33. Shalvi, Shaul & Dana, Jason & Handgraaf, Michel J.J. & De Dreu, Carsten K.W., 2011. "Justified ethicality: Observing desired counterfactuals modifies ethical perceptions and behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 115(2), pages 181-190, July.
    34. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Business unit innovation and the structure of executive compensation," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 279-313, April.
    35. Warren, Danielle E., 2007. "Corporate Scandals and Spoiled Identities: How Organizations Shift Stigma to Employees," Business Ethics Quarterly, Cambridge University Press, vol. 17(3), pages 477-496, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dan Amiram & Zahn Bozanic & James D. Cox & Quentin Dupont & Jonathan M. Karpoff & Richard Sloan, 2018. "Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature," Review of Accounting Studies, Springer, vol. 23(2), pages 732-783, June.
    2. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    3. Florackis, Chris & Sainani, Sushil, 2021. "Can CFOs resist undue pressure from CEOs to manage earnings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    4. Martin Nienhaus, 2022. "Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment," Review of Accounting Studies, Springer, vol. 27(4), pages 1276-1318, December.
    5. David Gomulya & Warren Boeker, 2016. "Reassessing board member allegiance: CEO replacement following financial misconduct," Strategic Management Journal, Wiley Blackwell, vol. 37(9), pages 1898-1918, September.
    6. Terry A. Baker & Thomas J. Lopez & Austin L. Reitenga & George W. Ruch, 2019. "The influence of CEO and CFO power on accruals and real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 325-345, January.
    7. Call, Andrew C. & Kedia, Simi & Rajgopal, Shivaram, 2016. "Rank and file employees and the discovery of misreporting: The role of stock options," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 277-300.
    8. Moore, Celia & Stuart, H. Colleen & Pozner, Jo-Ellen, 2010. "Avoiding the Consequences of Repeated Misconduct: Stigma’s Licence and Stigma’s Transferability," Institute for Research on Labor and Employment, Working Paper Series qt1q97p1bs, Institute of Industrial Relations, UC Berkeley.
    9. Davidson, Robert H., 2022. "Who did it matters: Executive equity compensation and financial reporting fraud," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    10. Haß, Lars Helge & Müller, Maximilian A. & Vergauwe, Skrålan, 2015. "Tournament incentives and corporate fraud," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 251-267.
    11. Smulowitz, Stephen J. & Almandoz, Juan, 2021. "Predicting employee wrongdoing: The complementary effect of CEO option pay and the pay gap," Organizational Behavior and Human Decision Processes, Elsevier, vol. 162(C), pages 123-135.
    12. Abdul Ghafoor & Rozaimah Zainudin & Nurul Shahnaz Mahdzan, 2019. "Factors Eliciting Corporate Fraud in Emerging Markets: Case of Firms Subject to Enforcement Actions in Malaysia," Journal of Business Ethics, Springer, vol. 160(2), pages 587-608, December.
    13. Smulowitz, Stephen J. & Almandoz, Juan (“John”), 2021. "Reprint of “Predicting employee wrongdoing: The complementary effect of CEO option pay and the pay gap”," Organizational Behavior and Human Decision Processes, Elsevier, vol. 166(C), pages 104-116.
    14. Fang, Ming & Francis, Bill & Hasan, Iftekhar & Wu, Qiang, 2022. "External social networks and earnings management," The British Accounting Review, Elsevier, vol. 54(2).
    15. Shane S. Dikolli & John C. Heater & William J. Mayew & Mani Sethuraman, 2021. "Chief Financial Officer Co-option and Chief Executive Officer Compensation," Management Science, INFORMS, vol. 67(3), pages 1939-1955, March.
    16. Ray Ball, 2009. "Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 277-323, May.
    17. Harris, Oneil & Karl, J. Bradley & Lawrence, Ericka, 2019. "CEO compensation and earnings management: Does gender really matters?," Journal of Business Research, Elsevier, vol. 98(C), pages 1-14.
    18. Joseph McManus, 2018. "Hubris and Unethical Decision Making: The Tragedy of the Uncommon," Journal of Business Ethics, Springer, vol. 149(1), pages 169-185, April.
    19. Hao, (Grace) Qing & Li, Keming, 2022. "Options trading and earnings management: Evidence from the penny pilot program," Journal of Corporate Finance, Elsevier, vol. 77(C).
    20. Yijiang Zhao & Kung Chen & Lee Yao, 2009. "Effects of takeover protection on earnings overstatements: evidence from restating firms," Review of Quantitative Finance and Accounting, Springer, vol. 33(4), pages 347-369, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jobhdp:v:166:y:2021:i:c:p:194-203. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/obhdp .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.