Executive indiscretions can hurt the bottom line

February 23, 2017 by Liz Mccune, University of Missouri-Columbia
In a new study, Adam Yore found that personal indiscretions made by executives can have multimillion dollar consequences for the companies that employ them. Credit: University of Missouri

A CEO outed for lying on a resume. An executive caught assaulting someone. A manager arrested for driving under the influence. These events certainly cast shadows on individuals, but a new study from Adam Yore, an assistant professor of finance in the Trulaske College of Business at the University of Missouri, shows that such indiscretions can have multimillion dollar consequences for the companies that employ them.

Yore and his co-authors examined 325 instances of executive indiscretions, which were divided into four categories: substance abuse, violence, sexual indiscretions and dishonesty. The analysis found an immediate 1.6 percent loss in in instances of managerial missteps, which translates into an average loss of $110 million in market capitalization. When indiscretions were committed by the CEO, the loss in shareholder value is 4.1 percent or $226 million. The dishonesty indiscretions were found to be the most damaging.

Furthermore, Yore found CEO indiscretions are associated with significant declines in the number of new major customers and joint venture partnerships. Yore says customer losses are particularly severe for those indiscretions that damage the firm's reputation.

"The basic premise of our study is, 'If you cheat on your wife, would you lie to your shareholders or business partners?' Our research certainly suggests shareholders and potential business partners perceive that someone who is duplicitous in his or her private life could be more willing to mislead professionally," Yore said. "Personal integrity at the top matters and can have major impacts on these companies."

Yore's study looked at single instances of managerial indiscretions and "repeat offenders." The likelihood of disciplinary turnover was similar for either type of indiscretion, but both were much more likely to occur at family-managed firms. In general, the researchers found that indiscretions occur more often at poorly governed firms where disciplinary turnover is less likely.

Researchers did find a caveat in examining indiscretions and value: companies that researchers categorized as "shady"—or industries where firms have a propensity for non-compliance with federal rules—saw smaller market reactions after such revelations came to light.

The study, "The Consequences of Managerial Indiscretions: Sex, Lies and Firm Value" is written by Yore, Brandon Cline at Mississippi State University and Ralph Walkling of Drexel University. It will be published in an upcoming edition of the Journal of Financial Economics.

Explore further: Zuckerberg or Buffett—Is youth or experience more valuable in the boardroom?

More information: Brandon N. Cline et al. The Agency Costs of Managerial Indiscretions: Sex, Lies and Firm Value, SSRN Electronic Journal (2010). DOI: 10.2139/ssrn.1573327

Related Stories

Cheaters use cognitive tricks to feel good about themselves

November 20, 2013

Most people believe that they are moral and good. They also believe cheating on a partner is wrong. So how do cheaters live with themselves after their infidelity? Understanding how they reconcile their indiscretions with ...

Student researchers shed light on ultrathin materials

December 12, 2016

In 2014, electrical engineering major Alex Yore was looking for a way to get some hands-on experience in materials science when he stumbled upon something fortuitous—a new physics faculty member looking to get his lab up ...

Giving investors a say on CEO pay limits excesses

January 11, 2017

As of Wednesday 4th January, the average FTSE100 CEO had made more money in 2017 than the average British worker will earn all year according to The High Pay Centre, a think tank. Ever since the financial crisis, legislators ...

Recommended for you

Study casts doubt on traditional view of pterosaur flight

May 22, 2018

Most renderings and reconstructions of pterodactyls and other extinct flying reptiles show a flight pose much like that of bats, which fly with their hind limbs splayed wide apart. But a new method for inferring how ancient ...

Experts disclose new details about 300-year-old shipwreck

May 22, 2018

A Spanish galleon laden with gold that sank to the bottom of the Caribbean off the coast of Colombia more than 300 years ago was found three years ago with the help of an underwater autonomous vehicle operated by the Woods ...

First violins imitated human voices: study

May 22, 2018

Music historians have long suspected that the inventors of the violin wanted to imitate the human voice, and a study out Monday shows how 16th to 18th century luthiers in Italy did it.

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.