Drilled to obey? Ex‐military CEOs and financial misconduct

Abstract

Research Summary: We examine the influence of CEOs' military background on financial misconduct using two distinctive datasets. First, we make use of accounting and auditing enforcement releases (AAER) issued by the U.S. Securities and Exchange Commission (SEC), which contain intentional and substantial cases of financial fraud. Second, we use a dataset of “lucky grants,” which provide a measure of the likelihood of grant dates of CEOs' stock options having been manipulated. Results for both datasets indicate that CEOs who served in the military are less inclined to be involved in fraudulent financial reporting and to backdate stock options. In addition, we find that these relationships are moderated by board oversight (CEO duality and independent directors in the board). Managerial Summary: CEOs who formerly served in the U.S. military are prevalent among U.S. firms. The military puts strong emphasis on the obedience of its personnel. In this study, we test if time spent in the military leads individuals to be more obedient to rules and regulations in the years after they have left the military and become CEOs. Our findings strongly suggest that CEOs who served in the U.S. military are less likely to be involved in financial misconduct. We also find evidence that tougher board oversight strengthens this relationship. Our findings have implications for regulators, auditors, practitioners, and researchers who are interested in determinants of and mechanisms to prevent fraud and stock option backdating.

The role of the board chair—A literature review and suggestions for future research

“…However, evidence shows that such reactions can be moderated by the presence of independent directors on the board (Mallette & Fowler, 1992; Mallette & Hogler, 1995). In contrast, many scholars agreed that role separation could largely restrain companies and boards from getting involved in corporate misconducts and control the potential of CEO entrenchment (Braun & Sharma, 2007; Chen & Hsu, 2009; Koch‐Bayram & Wernicke, 2018; Martin et al, 2019; Neville, Byron, Post, & Ward, 2019). However, this effect is likely to depend on several factors, such as the gender of the board chair (Tuliao & Chen, 2017), the extent of constitutional limit provisions (Connelly, Shi, & Zyung, 2017), and the level of corruption in the national context (Neville et al, 2019).…”

Board directors with foreign experience and stock price crash risk: Evidence from China

“…First, we contribute to the growing body of literature on the effects of corporate managers’ different individual experiences on financial decisions. Prior studies have focused on executive internal experience (Brockman, Campbell, Lee, & Salas, ), disaster experience (Bernile, Bhagwat, & Rau, ), military experience (Koch‐Bayram & Wernicke, ), pilot experience (Sunder, Sunder, & Zhang, ), academic experience (Jiang & Murphy, ), and mandatory management earnings forecast experience (Huang, Li, Tse, & Tucker, ), but are almost silent on individual foreign experience, especially in emerging markets like China.…”

In Military We Trust: The Effect of Managers’ Military Background on Mutual Fund Flows

“…First, military service demands a high degree of personal commitment and dedication that may translate to more compliant and ethical behavior in later civilian employment. Koch-Bayram and Wernicke (2018) find that ex-military CEOs are less inclined to engage in financial misconduct. In this regard, trust functions as an implicit contract, which serves as a substitute for costly monitoring, and investors likely prefer managers who require less monitoring.…”