Go before the whistle blows: an empirical analysis of director turnover and financial fraud

Yanmin Gao (), Jeong-Bon Kim (), Desmond Tsang () and Haibin Wu
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Yanmin Gao: City University of Hong Kong
Jeong-Bon Kim: University of Waterloo
Desmond Tsang: McGill University

Review of Accounting Studies, 2017, vol. 22, issue 1, No 9, 320-360

Abstract: Abstract This study investigates whether outside directors are aware of financial fraud. Our analysis focuses on the abnormal turnover of these directors during the fraud committing period, before fraud is discovered and before lawsuits are filed. Our empirical analysis shows that, during the fraud committing period, outside directors in fraud firms exhibit an abnormal level of turnover. Examining the characteristics of outside directors and boards at these fraud firms, we find strong evidence that female directors, directors who have greater stock ownership in the firm, and directors with multiple directorships at other firms are more likely to depart fraud firms. We also find some evidence that board size, number of meetings, and fraction of financial experts are related to abnormal turnover in fraud firms during the fraud committing period. We show that abnormal director turnover is significantly higher for fraud that is considered more egregious (i.e., involving fictitious transactions and disclosure problems). Lastly, directors are more likely to depart fraud firms with more serious fraud, as proxied by higher ex-post settlement amounts and longer fraud duration.

Keywords: Financial fraud; Board of director turnover; Director and board characteristics; Fictitious transaction; Disclosure problem (search for similar items in EconPapers)
JEL-codes: G30 G34 K22 M41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (19)

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DOI: 10.1007/s11142-016-9381-z

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