Governance and Performance Changes Following Accusations of Corporate Fraud

Dalia Marciukaityte^a , Samuel H. Szewczyk^b, Hatice Uzun^c and Raj Varma^d

^aLouisiana Tech University

^bDrexel University

^cLong Island University

^dUniversity of Delaware

Abstract

Using a sample of firms charged with government, financial reporting, stakeholder, or regulatory violation fraud over the period 1978 to 2001, our results show that subsequent to the accusation of fraud, firms increase the proportion of outsider directors on the board, as well as the independent outside directors on the monitoring committees of the board. Furthermore, our results show comparable long-run stock price and operating performance between firms charged with fraud and a matching sample of firms not accused of fraud. Collectively, these results suggest that improvements in internal control systems following accusations of fraud help repair damaged reputation and reinstate confidence in the firm.

Forthcoming in the Financial Analysts Journal
 

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