Journal of Business Ethics

, Volume 64, Issue 4, pp 405–419 | Cite as

The Effects of Fraud and Lawsuit Revelation on U.S. Executive Turnover and Compensation

  • Obeua S. Persons


This study investigates the impact of fraud/lawsuit revelation on U.S. top executive turnover and compensation. It also examines potential explanatory variables affecting the executive turnover and compensation among U.S. fraud/lawsuit firms. Four important findings are documented. First, there was significantly higher executive turnover among U.S. firms with fraud/lawsuit revelation in the Wall Street Journal than matched firms without such revelation. Second, although on average, U.S. top executives received an increase in cash compensation after fraud/lawsuit revelation, this increase is smaller than that of matched non-fraud/lawsuit firms. Third, fraud/lawsuit firms were more likely to change top executive when chief executive officer (CEO) was not the board chairman and CEO had been on the board for a short time. Fourth, fraud/lawsuit firms were more likely to reduce their executive cash compensation when profitability was low, firms were involved in fraud, the compensation committee size was small, and the board met more often. These findings indicate that although, in general, U.S. fraud/lawsuits firms did not reduce their executive cash compensation, those involved in fraud were more likely to reduce their executive cash compensation than to change their top executives. The finding, that ethical standards is not a significant factor for U.S. executive turnover nor compensation reduction, suggests that ethics appears to play no part in the board’s decisions, and that U.S. firms may have ethical standards in writing but they do not implement nor enforce the standards.


board of directors corporate governance ethical standards executive compensation executive turnover fraud lawsuit 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Agrawal, A., Jaffe, J., Karpoff, J. 1999‘Management Turnover and Governance Changes Following the Revelation of Fraud’Journal of Law and Economics37309342Google Scholar
  2. Alexander, C. 1999‘On the Nature of the Reputational Penalty for Corporate Crime: Evidence’Journal of Law and Economics42489526Google Scholar
  3. Beasley, M. S. 1996‘An Empirical Analysis of the Relation Between the Board of Director Composition and Financial Statement Fraud’The Accounting Review7443465Google Scholar
  4. Bhagat, S., Bizjak, J., Coles, J. 1998‘The Shareholder Wealth Implication of Corporate Lawsuits’Financial Management27527Google Scholar
  5. Brunelllo, G., Graziano, C., Parigi, B. 2003‘CEO Turnover in Inside-Dominated Boards: The Italian Case’Journal of Banking and Finance2710271051Google Scholar
  6. Conger, J., Finegold, A., Lawler, E.,III 1998‘Appraising Boardroom Performance’Harvard Business Review76136148Google Scholar
  7. Conyon, M., Peck, S. 1998‘Board Control, Rem- uneration Committee, and Top Management Compensation’Academy of Management Journal41146157Google Scholar
  8. Crystal, G. S. 1991‘Why CEO Compensation is So High?’California Management Review34929Google Scholar
  9. Dechow, P. M., Sloan, R. G., Sweeney, A. P. 1996‘Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC’Contemporary Accounting Research13136Google Scholar
  10. Gibson, M. S. 2003‘Is Corporate Governance Ineffective in Emerging Markets?’Journal of Financial and Quantitative Analysis38231250Google Scholar
  11. Hermalin, B., Weisbach, M. S. 1988‘The Determinants of Board Composition’The Rand Journal of Economics19589606Google Scholar
  12. Hill, W., Phan, P. 1991‘CEO Tenure as a Determinant of CEO Pay’Academy of Management Journal34707717Google Scholar
  13. Jensen, M. 1993‘The Modern Industrial Revolution, Exit, and Failure of Internal Control Systems’Journal of Finance48831880Google Scholar
  14. Kaplan, S. N. 1994‘Top Executive Reward and Firm Performance: A Comparison of Japan and the United States’Journal of Political Economy102510546CrossRefGoogle Scholar
  15. Karpoff, J., Lott, J. 1993‘The Reputational Penalty Firms Bear From Committing Criminal Fraud’Journal of Law and Economics36757802CrossRefGoogle Scholar
  16. Kim, Y., Ryu, K. 1998‘Duration Analysis of CEO Turnovers Using Proportional Model’Seoul Journal of Economics11243269Google Scholar
  17. Klein, B., Leffler, K. 1981‘The Role of Market Forces in Assuring Contractual Performance’Journal of Political Economy89615641Google Scholar
  18. Lambert, R., Larcker, D. 1987‘An Analysis of the Use of Accounting and Market Measures of Performance in Executive Compensation Contracts’Journal of Accounting Research2585125Google Scholar
  19. Lausten, M. 2002‘CEO Turnover, Firm Performance and Corporate Governance: Empirical Evidence on Danish Firms’International Journal of Industrial Organization20391414CrossRefGoogle Scholar
  20. Maksimovic, V., Titman, S. 1991‘Financial Policy and Reputation for Product Quality’Review of Financial Studies4175200CrossRefGoogle Scholar
  21. Maddala, G. S. 1991‘A Perspective on the Use of Limited-Dependent and Qualitative Variables Models in Accounting Research’The Accounting Review66788807Google Scholar
  22. Niehaus, G., Roth, G. 1999‘Insider Trading, Equity Issues, and CEO Turnover in Firms Subject to Securities Class Action’Financial Management285272Google Scholar
  23. Steiner, I. D. 1972Group Process and ProductivityAcademic PressNew York, NYGoogle Scholar
  24. Stone, M., Rasp, J. 1991‘Tradeoffs in the Choice Between Logit and OLS for Accounting Choice Studies’The Accounting Review66170187Google Scholar
  25. Warner, J., Watts, R., Wruck, K. 1988‘Stock Prices and Top Management Changes’Journal of Financial Economics20461492CrossRefGoogle Scholar
  26. Weisbach, M. S. 1988‘Outside Directors and CEO Turnover’Journal of Financial Economics20431460CrossRefGoogle Scholar

Copyright information

© Springer 2006

Authors and Affiliations

  1. 1.Department of Accounting, School of Business AdministrationRider UniversityLawrencevilleU.S.A.

Personalised recommendations