Repeated engagement in misconduct by executives involved with financial restatements

Abstract

Recidivism, or repeated engagement in misconduct despite being sanctioned, among top executives has received limited attention in the literature on organizational misconduct. Based on insights from fairness theory, supplemented by insights from attribution theory, we argue that the likelihood of an executive recidivating is associated with the perceived fairness of the sanctions he/she faces following the initial misconduct. We examine one consequence of a common managerial labor market sanction – lower compensation – on the likelihood of recidivism. Using a sample of Chief Financial Officers (CFOs) who left their positions following financial misconduct at their firms and subsequently migrated to another public firm in the same capacity, we test and find support for our prediction. A number of robustness and endogeneity tests add support to our recidivism model.