Study: Companies run by ostentatiously wealthy CEOs more likely to perpetrate fraud

at 12:23 PM ET, 06/10/2012

CEOs with a taste for luxury goods— expensive cars, boats, and houses—aren’t more likely to commit fraud, researchers found.But fraud is more likely to happen in the companies that they run, according to a new working paper for the National Bureau of Economic Research:
The perils of bling. (Tomohiro Ohsumi - BLOOMBERG)

We examine how executives’ behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”)...we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.

Big-spender CEOs also tend to run companies that take bigger risks, but have poorer performance and are more likely to go bankrupt:

Companies run by unfrugal CEOs are significantly more likely to engage in large acquisitions, to invest less in long-term organic growth, to operate assets in place less efficiently, to generate inferior subsequent accounting and 34 stock return per dollar of corporate investment, and to go bankrupt, suggesting a pattern of low frugality with regard to the stewardship of corporate resources.
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