Go before the whistle blows : an empirical analysis of director turnover and financial fraud

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

5 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)320-360
Journal / PublicationReview of Accounting Studies
Volume22
Issue number1
Early online date13 Dec 2016
Publication statusPublished - Mar 2017

Abstract

This study investigates whether outside directors are aware of financial fraud. Our analysis focuses on the abnormal turnover of these directors during the fraud committing period, before fraud is discovered and before lawsuits are filed. Our empirical analysis shows that, during the fraud committing period, outside directors in fraud firms exhibit an abnormal level of turnover. Examining the characteristics of outside directors and boards at these fraud firms, we find strong evidence that female directors, directors who have greater stock ownership in the firm, and directors with multiple directorships at other firms are more likely to depart fraud firms. We also find some evidence that board size, number of meetings, and fraction of financial experts are related to abnormal turnover in fraud firms during the fraud committing period. We show that abnormal director turnover is significantly higher for fraud that is considered more egregious (i.e., involving fictitious transactions and disclosure problems). Lastly, directors are more likely to depart fraud firms with more serious fraud, as proxied by higher ex-post settlement amounts and longer fraud duration.

Research Area(s)

  • Board of director turnover, Director and board characteristics, Disclosure problem, Fictitious transaction, Financial fraud