The impact of corporate fraud on director‐interlocked firms: Evidence from bank loans

Abstract

We examine the impact of corporate fraud committed by one firm (the “fraudulent firm”) on other firms with interlocking directors (the “interlocked firms”), focusing on the debtholder side. We argue that the revelation of a fraudulent firm's fraud can damage the reputation of the interlocked firms because corporate governance can propagate via director interlocks. Empirically, we find that the interlocked firms' cost of debt is higher and the loan covenants become stricter after the fraud cases of the fraudulent firms are revealed. Consistent with the corporate governance propagation explanation, our results are weaker (stronger) for interlocked firms that have better (worse) pre‐event corporate governance standards. Our findings suggest that corporate fraud of fraudulent firms can affect other firms through director‐interlocks beyond shareholder value.

Paradox of White Collar Crime and Fraud in Banking: Critical Analysis of Agency Theory and Gone Theory

“…Besides that, the percentage of happiness and welfare for principals is too excessive when compared to those allocated to happiness and employee welfare (agents) (Lan & Heracleos, 2010). This opinion is supported and in line with research conducted by who reported that the more extensive and broader its size, the bigger the distribution of the proportion of income distribution depends on management and employees (Lai, Lei, & Song, 2019).…”

Benefit or burden? A comparison of CFO and CEO outside directorships

“…Prior research examines the different forms in a variety of contexts, revealing both positive and negative effects. For example, reciprocal interlocks increase innovation but also increase the diffusion of aggressive corporate tax policies, the cessation of quarterly earnings guidance, and increase the cost of debt for non‐fraud firms interlocked with fraud firms (Brown, 2011; Cai et al., 2014; Helmers et al., 2017; Lai et al., 2019). We examine one form of nonreciprocal board interlock, that is, CEOs or CFOs of one firm sitting on another firm's board.…”

Corporate fraud as a negative signal: Implications for firms’ innovation performance

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