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Review of Accounting Studies

, Volume 22, Issue 1, pp 320–360 | Cite as

Go before the whistle blows: an empirical analysis of director turnover and financial fraud

  • Yanmin Gao
  • Jeong-Bon Kim
  • Desmond Tsang
  • Haibin Wu
Article

Abstract

This study investigates whether outside directors are aware of financial fraud. Our analysis focuses on the abnormal turnover of these directors during the fraud committing period, before fraud is discovered and before lawsuits are filed. Our empirical analysis shows that, during the fraud committing period, outside directors in fraud firms exhibit an abnormal level of turnover. Examining the characteristics of outside directors and boards at these fraud firms, we find strong evidence that female directors, directors who have greater stock ownership in the firm, and directors with multiple directorships at other firms are more likely to depart fraud firms. We also find some evidence that board size, number of meetings, and fraction of financial experts are related to abnormal turnover in fraud firms during the fraud committing period. We show that abnormal director turnover is significantly higher for fraud that is considered more egregious (i.e., involving fictitious transactions and disclosure problems). Lastly, directors are more likely to depart fraud firms with more serious fraud, as proxied by higher ex-post settlement amounts and longer fraud duration.

Keywords

Financial fraud Board of director turnover Director and board characteristics Fictitious transaction Disclosure problem 

JEL classification

G30 G34 K22 M41 

Notes

Acknowledgements

We appreciate the valuable comments from Patricia Dechow (the editor), an anonymous referee, David Farber, Weili Ge, and Oliver Li. Earlier versions of the paper were presented at the 2013 AAA Western Regional Meeting, the 2013 CAAA Annual Conference, the 2013 ATINER International Conference on Accounting, and the 2014 AAA Annual Meeting. We thank participants and discussants of the aforementioned conferences as well as doctoral seminar participants at City University of Hong Kong, Fudan University, and University of Waterloo for their comments and suggestions. We gratefully acknowledge financial support from the City University of Hong Kong, Fonds de Recherche du Québec – Société et Culture, and McGill University. All errors are, of course, ours.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Yanmin Gao
    • 1
  • Jeong-Bon Kim
    • 2
  • Desmond Tsang
    • 3
  • Haibin Wu
    • 1
  1. 1.College of BusinessCity University of Hong KongKowloon TongHong Kong
  2. 2.School of Accounting and FinanceUniversity of WaterlooWaterlooCanada
  3. 3.Desautels Faculty of ManagementMcGill UniversityMontrealCanada

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