CEO Connectedness and Corporate Frauds

Abstract

We find connections CEOs develop with top executives and directors through their appointment decisions heighten the risk of corporate fraud. Appointment-based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases expected costs of fraud by helping to conceal frauds, making CEO dismissal less likely upon fraud discovery, and lowering the coordination costs of carrying out illegal activities. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on frauds. Appointment-based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.