Management Turnover and Governance Changes Following the Revelation of Fraud

TLDR

Fraud scandals can prompt firms to replace managers or board members to restore performance, reputation, and limit liability exposure. Our analysis shows that, after controlling for firm characteristics, fraud revelations do not systematically raise senior manager or director turnover, indicating limited net benefit from leadership changes.

Abstract

Fraud scandals can create incentives to change managers in an attempt to improve the firm's performance, recover lost reputational capital, or limit the firm's exposure to liabilities that arise from the fraud. It also is possible that the revelation of fraud creates incentives to change the composition of the firm's board, to improve the external monitoring of managers, or to rent new directors' valuable reputational or political capital. Despite such claims, we find little systematic evidence that firms suspected or charged with fraud have unusually high turnover among senior managers or directors. In univariate comparisons, there is some evidence that firms committing fraud have higher managerial and director turnover. But in multivariate tests that control for other firm attributes, such evidence disappears. These findings indicate that the revelation of fraud does not, in general, increase the net benefits to changing managers or the firm's leadership structure.