Tag Archives: Journal of Financial Economics

Research shows CEOs who live frugally make better leaders

The flashier they are, the more open they are to fraud.

But according to research to be published in the Journal of Financial Economics, bosses who enjoy the finer things in life can be bad for their companies. The researchers hired private investigators to uncover the personal assets of a sample of American chief executives. They then compared those who own trinkets such as a yacht, a $75,000 car or a super-expensive house against a list of companies cited for fraudulent accounting by the Securities and Exchanges Commission. After controlling for things such as its size, the probability that a firm with a flashy CEO will commit fraud, they found, increases by 6% a year for every year that he is at the helm. At firms run by more frugal heads, on the other hand, the likelihood of fraud decreases by 61% every year.

Interestingly, this is not because ostentatious bosses feel pressure to maintain their lifestyles. Indeed, such CEOs are no more likely to be fraudulent than their parsimonious peers. Rather it is underlings who cook the books. This might be because such CEOs tend to hire executives with a similar mindset to their own. The study found, for example, that a chief financial officer is more likely to own a yacht if his boss does. They also tend to socialise more with directors at the firm—at country clubs and the like. Being part of such a pally clique means they are less likely to monitor what the others are up to, thinks Aiyesha Dey of the University of Minnesota, one of the authors.

Bosses with expensive lifestyles are also more likely to introduce equity-based incentive schemes, the report finds. Closely linking remuneration to the share price may encourage staff to caress the figures. Furthermore, says Ms Dey, such CEOs tend to run businesses the way they do their personal lives, prone to showy acquisitions and less regard for the long-term consequences.