We find that connections CEOs develop with top executives and directors through their appointment decisions increase the risk of corporate fraud. Appointment-based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases the expected costs of fraud by helping conceal fraudulent activity, making CEO dismissal less likely upon discovery, and lowering the coordination costs of carrying out illegal activity. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on fraud. Appointment-based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.ALLEGATIONS OF CORPORATE and securities fraud have dominated headlines over the last decade. Corporate wrongdoing damages investor confidence, decreases shareholder value, causes misallocation of capital, and increases financial market instability, leading a number of scholars to examine factors affecting the likelihood of fraud and its detection. 1 Largely absent from these inquiries, however, is an analysis of the role played by the CEO's connections with other * Khanna is at 1203 1204The Journal of Finance R leaders within the firm. 2 CEOs have substantial "soft" influence in addition to explicit legal authority to direct corporate behavior, 3 of which wrongdoing is but one potential outcome. This soft influence is likely to be strengthened by the CEO's internal connections.CEO connections with other top executives and directors could increase or decrease the incidence of corporate fraud. As with other corporate activities, corporate wrongdoing often requires coordination between, or acquiescence by, top executives and/or board members. Such coordination and acquiescence can take the form of direct involvement in criminal activities, or a reluctance to "blow the whistle." A CEO's close connections may facilitate wrongdoing by providing the necessary support. However, CEO connections may also help deter fraud. The CEO's familiarity with other top executives may enable him to detect early signs of fraudulent activity. Further, when a CEO is not aware that a certain activity is illegal, a common problem in some areas of white collar crime, closer interpersonal relationships could make it easier for other executives and board members to help the CEO avoid wrongdoing. Thus, CEO connectedness can cut both ways. Which effect prevails is an empirical question.We consider CEO connectedness to top executives and directors through two sources: appointment decisions and prior network ties. Our results indicate that appointment-based connectedness warrants attention. In particular, it is significantly associated with not only greater likelihood of fraud, but also lower expected costs of engaging in fraud: it decreases the likelihood of fraud detection, lengthens the time from fraud commission to detection, reduces the likelihood of forced CEO turnover upon ...

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A central problem in conducting an event study of the valuation effects of corporate governance reforms is that most reforms affect all firms in a country. Share price changes may reflect the reforms, but could also reflect other information. We address this identification issue by studying India's adoption of major governance reforms (Clause 49). Clause 49 requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls. The reforms were sponsored by the Confederation of Indian Industry (an organization of large Indian public firms), applied initially to larger firms, and reached smaller public firms only after a several‐year lag. The difference in effective dates offers a natural experiment: large firms are the treatment group for the reforms; small firms provide a control group for other news affecting India generally. The May 1999 announcement by Indian securities regulators of plans to adopt what became Clause 49 is accompanied by a 4 percent increase in the price of large firms over a two‐day event window (the announcement date plus the next trading day), relative to smaller public firms; the difference grows to 7 percent over a five‐day event window and 10 percent over a two‐week window. Mid‐sized firms had an intermediate reaction. Faster‐growing firms gained more than other firms, consistent with firms that need external equity capital benefiting more from governance rules. Cross‐listed firms gained more than other firms, suggesting that local regulation can sometimes complement, rather than substitute for, the benefits of cross‐listing. The positive reaction of large Indian firms contrasts with the mixed reaction to the Sarbanes‐Oxley Act (which is similar to Clause 49 in important respects), suggesting that the value of mandatory governance rules may depend on a country's prior institutional environment.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Firms' Corporate Social Responsibility (CSR) activity has become the subject of a large literature in recent years. This paper analyzes CSR activity using quasi-experimental variation created by Section 135 of India's Companies Act of 2013, which requires (on a "comply-orexplain" basis) that firms satisfying specific size or profit thresholds spend a minimum of 2% of their net profit on CSR. Our analysis uses financial statement and stock price data on Indian firms from the Prowess database, along with hand-collected data from firms' disclosures of CSR activity. By combining a regression discontinuity (RD) framework (based on a nonparametric local polynomial regression approach) with a standard event study, we find a negative and substantial effect on the value of affected firms (relative to unaffected firms) around the crucial event date. This effect seems to be concentrated among firms that are less customer-facing, as indicated by low advertising expenditures. Using a difference-in-difference approach, we find significant increases in CSR activity among firms affected by Section 135, especially in the fraction of firms engaging in CSR spending. The fraction of firms subject to Section 135 that engage in advertising expenditures appears to have declined, consistent with substitution between advertising and CSR. There is no robust evidence of any significant impact on sales or accounting performance, although a modest decline in the return on assets cannot be ruled out. For a subset of large firms, we hand-collect comprehensive CSR data and find that while firms initially spending less than 2% increased their CSR activity, large firms initially spending more than 2% reduced their CSR expenditures after Section 135 came into effect. We explore various explanations for this presumably unintended consequence of Section 135, and also seek to derive some wider implications of this analysis for understanding the role of CSR. Terms of use: Documents in EconStor mayJEL-Codes: K220.Keywords: corporate social responsibility, India, company law, event study. (2014) argue that exogenous improvements in governance lead to reduced growth in CSR spending. They use the 2003 tax reform in the US (that reduced tax rates on dividends) as source of variation in insider ownership. They also find that close shareholder votes (just above 50%) for measures that improve governance lead to slower CSR growth. On the other hand, Ferrell, Liang and Renneboog (2014) use a dataset of...

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