Remember Kozlowski? Turns Out A Bigger Yacht Means Higher Risk Of Corporate Fraud

Patti Gravel

In a new working paper from the National Bureau of Economic Research, economists Robert Davidson, Aiyesha Dey and Abbie J. Smith have drawn some intriguing conclusions about the relationship between a record of legal infractions like parking tickets, ownership of luxury goods like expensive cars, and the probability of corporate fraud and inaccurate financial reporting.

Minor Legal Infractions

The researchers found that CEOs and CFOs with prior legal infractions — especially traffic violations — have a “relatively high propensity to perpetrate fraud.” That means that CEOs with a record of legal infractions are more likely to be named in cases of corporate fraud than their more law-abiding counterparts.

Ownership of Luxury Goods

CEOs were defined as “unfrugal” if they owned a car valued above $75,000; a boat over 25 feet long; or a primary home worth two times the cost of most homes in zipcodes within 10 miles of the corporate headquarters/an additional home worth two times the cost of most homes in that metropolitan area.

CEOs who owned one or more of those luxury goods were not more likely to personally perpetrate fraud, but ran firms with a higher risk of firm-wide fraud and material reporting errors.  One question that begs is: if they knew then what we know now, could Tyco have prevented the whole Kozlowski fiasco?

The economists finished their report posing an interesting question: “Are the prior legal infractions and ownership of luxury goods by politicians related to their stewardship of taxpayers’ money?” Now that would make a super-duper StateImpact story!