D. Scott Lee

The Consequences to Managers for Financial Misrepresentation

We track the fortunes of all 2,206 individuals identified as responsible parties for all 788 Securities and Exchange Commission (SEC) and Department of Justice (DOJ) enforcement actions for financial misrepresentation from January 1, 1978 through September 30, 2006. Fully 93% lose their jobs by the end of the regulatory enforcement period. Most are explicitly fired. The likelihood of ouster increases with the cost of the misconduct to shareholders and the quality of the firms governance. Culpable managers also bear substantial financial losses through restrictions on their future employment, their shareholdings in the firm, and SEC fines. A sizeable minority (28%) face criminal charges and penalties, including jail sentences that average 4.3 years. These results indicate that the individual perpetrators of financial misconduct face significant disciplinary action.

Fight or flight: managing stigma in executive careers

We examine the labor market consequences borne by executives who remain at financially distressed firms relative to those who flee to another employer to avoid the stigma of failure. Our study makes two contributions. First, we document an ex ante dimension of executive labor markets unaccounted for by ex post settling up models. Specifically, we show that executives who ‘jump ship’—change employers in the two years prior to the failure—suffer fewer labor market consequences than their counterparts who remain with the failing firm. Second, we extend the study of bankruptcy stigma to examine how stigma might be managed by jumping ship. Copyright

Foreign Bribery: Incentives and Enforcement

We use data from enforcement actions initiated under the U.S. Foreign Corrupt Practices Act (FCPA) to examine the hypothesis that managers engage in foreign bribery because it is profitable. We find that bribery is associated with projects that have positive ex ante net present value. Even net of costs and penalties, the average ex post NPV for bribe-related projects is non-negative for firms that are caught, and the reputational loss is negligible. For a subset of firms that face comingled charges for financial fraud, however, the direct cost and reputational loss are larger and the ex post NPV is negative.