Real Estate Shocks and Financial Advisor Misconduct

Does local competition and firm market power affect investment adviser misconduct?

“…At the firm level, such factors include corporate culture (Bernheim, 1994;Liu, 2016;MacLean, 2008), board monitoring for detecting and curbing misconduct (e.g., Nguyen et al, 2016), and investor perceptions of those firms that are known to engage in misconduct (e.g., Akhigbe et al, 2005). At the individual level, any decision to engage in illegal activities or misconduct is a choice based on optimizing utility as a function of personal cost-benefit tradeoffs (Becker, 1968;Dimmock et al, 2019;Law & Zuo, 2020), and on co-worker influence (Banerjee, 1992;Dimmock et al, 2018;Ellison & Fudenberg, 1995). We contribute to the literature by demonstrating that a firm's local environment, in terms of both local average competition and the firm's local market power, influences the likelihood of misconduct beyond the individual-and internal firm-level characteristics.…”

For Richer, for Poorer: Bankers' Liability and Bank Risk in New England, 1867 to 1880

“…For example, Burns and Kedia (2006), Efendi, Srivastava, and Swanson (2007), and Peng and Röell (2008) document a positive association between fraud and the use of options that makes compensation more sensitive to short-term results. Clifford and Gerken (2019) and Dimmock, Gerken, and Van Alfen (2019) provide further evidence that fraud is more likely if incentives are dominated by shortterm financial considerations, because of either uncertain long-term payouts or current financial distress. In the context of banking, Flanagan and Purnanandam (2019) argue that bank managers can underreport nonperforming loans to boost their short-term pay.…”