CEO Connectedness and Corporate Fraud
VIKRAMADITYA KHANNA, E. HAN KIM, and YAO LU∗
ABSTRACT
We find that connections CEOs develop with top executives and directors through
their appointment decisions increase 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
the expected costs of fraud by helping conceal fraudulent activity, making
CEO dismissal less likely upon discovery, and lowering the coordination costs of
carrying out illegal activity. Connections based on network ties through past employment,
education, or social organization memberships have insignificant effects on
fraud. Appointment-based CEO connectedness warrants attention from regulators,
investors, and corporate governance specialists.