Governance and performance changes after accusations of corporate fraud

Abstract

Using a sample of companies charged with government, financial reporting, or stakeholder fraud or regulatory violation in the United States during the 1978-2001 period, this study found that after the accusation of fraud, companies increased the proportion of outsider directors on their boards of directors and on the monitoring committees of the boards. Furthermore, the results show comparable long-run stock price and operating performance between companies charged with fraud and a matching sample of companies not accused of fraud. Collectively, these results suggest that improvements in internal control systems following accusations of fraud help repair a company's damaged reputation and reinstate confidence in the company. © 2006, CFA Institute.