CEO-Director Connections And Corporate Fraud: Not Just Whether You Are Connected But How
Author(s) N K Chidambaran, Simi Kedia, Nagpurnanand Prabhala

ABSTRACT

We study the relation between fraud and social ties between CEOs and directors. While the sum of all types of social ties decreases fraud probability, this result masks heterogeneity in the effect of different types of ties. Nonprofessional ties from common alma mater or non-business service increase fraud likelihood. Professional ties from prior employment histories lower fraud probability, especially when the ties are formed through service as executives rather than as directors or director and executive. The results are robust to conventional controls, industry, new controls based on biographic data, and endogeneity due to unobserved variation in director quality. Our results suggest that while independence matters, variation within independent directors is at least as important as independence per se.


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