The CEO of a major corporation has been caught manipulating earnings reports. He exits quickly, pushed along by the board, which is eager to keep the news quiet and alert the media only if absolutely necessary. Six months later, the firm revises their earnings forecast and the SEC begins an investigation into the matter, finding that indeed, laws have been broken, but the crime’s perpetrator is long gone. What now? Who faces the consequences for defrauding stakeholders?

Previous research suggests that few of these fraudsters ever see their comeuppance. A new study from researchers at Texas A&M University’s Mays Business School says, however, previous findings were hindered by incomplete data. In actuality, most executives caught cooking the books face ramifications far beyond losing their jobs.

Researchers Jerry Martin, Scott Lee, and Jon Karpoff began their study with all 788 enforcement actions for financial misrepresentation initiated by the SEC and U.S. Department of Justice from 1978-2006. Their analysis addressed three specific questions:

  • Do culpable managers lose their jobs?
  • What factors are associated with job loss?
  • Do they face other consequences, such as debarment from future executive positions, regulatory fines, wealth losses from shareholding, and criminal charges?

Previous studies, including one that Karpoff had published a decade earlier, were constrained by not knowing who the perpetrators of the crime were, therefore they focused on arbitrary groups of executives deemed likely to be held responsible. For example, several studies examined the post-disclosure employment of the firm’s incumbent CEO, chairman, and president.

Martin’s carefully compiled database identified the actual perpetrators associated with each enforcement action, allowing he and coauthors to show that the individual(s) occupying these posts were often not implicated in the crime. In fact, the firm terminated 60 percent of these perpetrators before the investigation was initiated, 80 percent were gone when the investigation was announced to the public, and 90 percent were gone when SEC filed its final proceeding release.

This new study overturned the conventional wisdom that executives associated with fraud generally face few repercussions for their crime. Of 3,164 individuals alleged to have cooked the books in this study, 1,433 were executive employees. Ninety-two percent of these executives were ousted and sixty percent were unceremoniously fired, something that rarely happens in executive departures following poor performance, say the researchers. The SEC debarred 40 percent of these executives from future service as an officer or director of a publicly traded firm.

On average, these executives paid a total of $8.3 million in restitution and fines.  Based on declines in the value of their shareholdings in the firm, the executives’ average losses were between $2 million and $23 million (the estimates depend on boundary assumptions the researchers had to make about the unobservable price paid for the shares). Twenty-eight percent of these executives were indicted, of which only four percent were acquitted. Average jail and probationary sentences were five and three years respectively.

While fraud will be with us always, Martin, Lee and Karpoff show that firm’s internal governance appears to work fairly well. Specifically, they show that the likelihood of the perpetrator being ousted increases with the severity of the shareholders’ losses and monitoring by independent directors, outside blockholders, and non-perpetrator insiders with substantial shareholdings.

Martin is a recent PhD graduate from Mays Business School, now an associate professor of finance at American University. Lee is a professor of finance at Mays, and Karpoff is a professor of finance at University of Washington.


Jonathan M. Karpoff, D. Scott Lee, and Gerald S. Martin, “The Consequences to Managers for Financial Misrepresentation” Journal of Financial Economics, v88, n2, 193-215 (May 2008).