Internal Governance and Corporate Fraud

This article examines whether internal governance in the form of managerial dissent between the CEO and subordinate executives reduces fraud likelihood. We model fraud as a rational decision in a cost-benefit framework and a collective activity by all executives. The model predicts a negative relation between dissent and fraud occurrence. We use three measures for higher dissent: a larger fraction of subordinates having joined the firm prior to the CEO, a lower CEO pay slice, and a smaller difference in pay performance sensitivity between the two; and find supporting evidence. We address endogeneity concerns by including firm-fixed effects, constructing a propensity score-matched sample, and conducting instrument variable analysis. We also find that fraud duration is negatively related to dissent.