The Consequences to Managers for Financial Misrepresentation

  • Jonathan M. KarpoffEmail author
  • D. Scott Lee
  • Gerald S. Martin


We track the fortunes of all 2,206 individuals identified as responsible parties for all 788 Securities and Exchange Commission (SEC) and Department of Justice (DOJ) enforcement actions for financial misrepresentation from January 1, 1978 through September 30, 2006. A total of 93 % lose their jobs by the end of the regulatory enforcement period. Most are explicitly fired. The likelihood of ouster increases with the cost of the misconduct to shareholders and the quality of the firm’s governance. Culpable managers also bear substantial financial losses through restrictions on their future employment, their shareholdings in the firm, and SEC fines. A sizeable minority (28 %) face criminal charges and penalties, including jail sentences that average 4.3 years. These results indicate that the individual perpetrators of financial misconduct face significant disciplinary action.


Enforcement Action Target Firm Board Independence Government Accountability Office Board Chair 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Agrawal, A., & Cooper, T. (2007). Corporate governance consequences of accounting scandals: Evidence from top management, CFO and Auditor Turnover. Unpublished Working Paper. University of Alabama.Google Scholar
  2. Agrawal, A., Jaffe, J. F., & Karpoff, J. M. (1999). Management turnover and governance changes following the revelation of fraud. Journal of Law and Economics, 42(1), 309–342.CrossRefGoogle Scholar
  3. Alexander, C. R. (2007). The market consequences of financial reporting frauds: toward a reputation-rebuilding hypothesis. Unpublished working paper. Securities and Exchange Commission.Google Scholar
  4. Alexander, C. R. (1999). On the nature of the reputational penalty for corporate crime: evidence. Journal of Law and Economics, 42(1), 489–526.Google Scholar
  5. Arlen, J. H. (2007). Public versus private enforcement of securities fraud. Unpublished working paper. New York University.Google Scholar
  6. Arlen, J. H., & Carney, W. J. (1992). Vicarious liability for fraud on securities markets: theory and evidence. University of Illinois Law Review, pp. 691–740.Google Scholar
  7. Arlen, J., & Kraakman, R. (1997). Controlling corporate misconduct: An analysis of corporate liability regimes. NYU Law Review, 72, 687–779.Google Scholar
  8. Arthaud-Day, M. L., Certo, S. T., Dalton, C. M., & Dalton, D. R. (2006). A changing of the guard: executive and director turnover following corporate financial restatements. Academy of Management Journal, 49, 1119–1136.CrossRefGoogle Scholar
  9. Atkins, P. S. (2005). Speech by SEC Commissioner: Remarks before the Atlanta Chapter of the National Association of Corporate Directors.
  10. Barclay, M., & Torchio, F. C. (2001). A comparison of trading models used for calculating aggregate damages in securities litigation. Law and Contemporary Problems, 64, 105–136.CrossRefGoogle Scholar
  11. Beneish, M. D. (1999). Incentives and penalties related to earnings overstatements that violate GAAP. Accounting Review, 74(4), 425–457.CrossRefGoogle Scholar
  12. Bonner, S. E., Palmrose, Z.-V., & Young, S. M. (1998). Fraud type and auditor litigation: an analysis of SEC accounting and auditing enforcement releases. Accounting Review, 73(4), 503–532.Google Scholar
  13. Boone, A. L., Field, L. C., Karpoff, J. M., & Raheja, C. G. (2007). The determinants of corporate board size and composition: an empirical analysis. Journal of Financial Economics, 85, 66–101.CrossRefGoogle Scholar
  14. Cannella, A. A, Jr, Fraser, D. R., & Lee, D. S. (1995). Firm failure and managerial labor markets: evidence from Texas banking. Journal of Financial Economics, 38, 185–210.CrossRefGoogle Scholar
  15. Carleton, W. T., Weisbach, M. S., & Weiss, E. J. (1996). Securities class action lawsuits: a descriptive study. Arizona Law Review, 38, 491.Google Scholar
  16. Choi, S. J., Pritchard, A. C., & Wiechman, A. C. (2012). Scandal enforcement at the SEC: salience and the arc of the option backdating investigations (March 6, 2012). Scholar
  17. Cleves, M. A., Gould, W. M., & Gutierrez, R. G. (2004). An Introduction to Survival Analysis Using Stata. Stata Press, College Station, TX. Google Scholar
  18. Cox, J.D., Thomas, R.S., Kiku, D., 2003. SEC enforcement heuristics: An empirical inquiry. Duke Law Journal, 53, 737–779.Google Scholar
  19. Desai, H., Hogan, C. E., & Wilkins, M. S. (2006). The reputational penalty for aggressive accounting: earnings restatements and management turnover. Accounting Review, 81(1), 83–112.CrossRefGoogle Scholar
  20. Dyck, I., Morse, J. A., & Zingales, A. L. (2007). Who blows the whistle on corporate fraud? Unpublished working paper, University of Toronto, University of Michigan, and University of Chicago.Google Scholar
  21. Dyl, E. A. (1999). Estimating economic damages in class action securities fraud litigation. Journal of Forensic Economics, 12, 1–11.CrossRefGoogle Scholar
  22. Feroz, E. H., Park, K., & Pastena, V. S. (1991). The financial and market effects of the SEC’s accounting and auditing enforcement releases. Journal of Accounting Research, 29, 107–142.CrossRefGoogle Scholar
  23. Fich, E. M., & Shivdasani, A. (2007). Financial fraud, director reputation, and shareholder wealth. Journal of Financial Economics Forthcoming, 86, 306–336.CrossRefGoogle Scholar
  24. Files, R., Martin, G. S., & Rasmussen, S. J. (2012). The monetary benefit of cooperation in regulatory enforcement actions for financial misrepresentation (March 19, 2012).
  25. Gilson, S. C. (1989). Management turnover and financial distress. Journal of Financial Economics, 25, 241–262.CrossRefGoogle Scholar
  26. Hall, R. E., & Lazear, V. A. (2000). Reference guide on estimation of economic losses in damage awards. Reference Manual on Scientific Evidence, second ed. Federal Judicial Center, Washington, pp. 471–523.
  27. Helland, E. (2006). Reputational penalties and the merits of class action securities litigation. Journal of Law and Economics, 49(2006), 365–396.CrossRefGoogle Scholar
  28. Jackson, H. E., & Roe, M. J. (2007). Public enforcement of securities laws: preliminary evidence. Unpublished working paper. Harvard Law School.Google Scholar
  29. Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. Journal of Finance, 48, 831–880.CrossRefGoogle Scholar
  30. Karpoff, J. M., & Lott, J. R, Jr. (1993). The reputational penalty firms bear from committing criminal fraud. Journal of Law and Economics, 36, 757–802.CrossRefGoogle Scholar
  31. Karpoff, J. M., Lee, D. S. & Martin, G. S. (2008a). The cost to firms of cooking the books. Journal of Financial and Quantitative Analysis, 43, 581–612.Google Scholar
  32. Karpoff, J. M., Lee, D. S., & Martin, G. S. (2008b). The legal penalties for financial misrepresentation (May 2, 2007)Google Scholar
  33. Karpoff, J. M., Lee, D. S., & Martin, G. S. (2012). The economics of bribery: Evidence from FCPA enforcement actions (July 29, 2013).
  34. King, G., & Zeng, L. (1999). Logistic regression in rare events data. Unpublished working paper. Department of Government, Harvard University.
  35. LaPorta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What works in securities laws? Journal of Finance, 61, 1–32.CrossRefGoogle Scholar
  36. Lucas, W. R. (1997). A practitioners guide to the SEC’s investigative and enforcement process. Temple Law Review, 53, 53–70.Google Scholar
  37. Polinsky, A. M., & Shavell, S. (1993). Should employees be subject to fines and imprisonment given the existence of corporate liability? International Review of Law and Economics, 13, 239–257.CrossRefGoogle Scholar
  38. Semadeni, M. B., Cannella, A. A, Jr, Fraser, D. R., & Lee, D. S. (2008). Fight or flight: Managing stigma in executive careers. Strategic Management Journal, 29, 557–567.CrossRefGoogle Scholar
  39. Tomz, M., King, G., & Zeng, L. (1999). ReLogit: Rare Events Logistic Regression, Version 1.1. Harvard University, Cambridge, MA (Oct. 1).
  40. US General Accounting Office (GAO), (2002). Financial Statement Restatements: Trends, Market Impacts, Regulatory Responses, and Remaining Challenges. GAO-03-138. US Government Accountability Office, Washington, DC.
  41. US General Accounting Office (GAO), (2003). Financial Statement Restatement Database. GAO-03-395R. US Government Accountability Office, Washington, DC.
  42. US Securities and Exchange Commission, (1973). Commencement of Enforcement Proceedings and Termination of Staff Investigations Release No. 5310 (Feb. 28).Google Scholar
  43. Warner, J. B., Watts, R. L., & Wruck, K. H. (1988). Stock prices and top management changes. Journal of Financial Economics, 20, 461–492.CrossRefGoogle Scholar
  44. Weisbach, M. S. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20, 431–460.CrossRefGoogle Scholar
  45. Yermack, D. (1996). Higher market valuation of companies with a smaller board of directors. Journal of Financial Economics, 40, 185–211.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Jonathan M. Karpoff
    • 1
    Email author
  • D. Scott Lee
    • 2
  • Gerald S. Martin
    • 3
  1. 1.University of Washington, Foster School of BusinessSeattleUSA
  2. 2.University of Nevada, Lee Business SchoolLas VegasUSA
  3. 3.American University, Kogod School of BusinessWashingtonUSA

Personalised recommendations