Quarterly Pressures Turn Good Execs Bad

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Quarterly Pressures Turn Good Execs Bad

Research from the Academy of Management Journal
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Pressure from investors - not criminal nature - prompts execs to commit fraud, envtl violations. http://bit.ly/iB2xg1 @NBSnet
Tuesday, May 10, 2011 - 10:54am

CONTENT: Blog

Numerous high-profile, profitable firms have engaged in illegal activities to improve their performance. In recent history, we can easily recall the experiences of Enron, Arthur Anderson, and Barings Bank.

Why would these firms engage in such bad—and risky—behaviour? Being caught can compromise profits and access to key resources and cause reputational damage for both the firm and its management.
 
Researchers Yuri Mishina (Michigan State University), Bernadine Dykes (University of Delaware), Emily Block (University of Notre Dame) and Timothy Pollock (The Pennsylvania State University) argue it’s because managers, once profitable, don’t like to lose.
  
The researchers examined data from a set of 194 S&P 500 manufacturers from 1990-1999. “Illegal activity” included convictions or settlements for environmental violations, anti-competitive actions, false claims and fraud in any given year.
  
The authors found firms that do well (i.e. outperform market expectations or other firms in their industries) are more likely to be involved in illegal activities than those that don’t. Also, prominent firms that are successful are even more likely to engage in illegal activity. This seems counterintuitive—we might expect firms that perpetually “lose out” would be most likely to engage in illegal activities.
  
What explains these startling observations? As behavioural economics and psychology show, individuals don’t always make rational decisions. In this same vein, the authors focus on three likely explanations: Loss Aversion, The "House Money" Effect, and Executive Hubris.
 
 
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Keywords: Business & Trade | Reporting | behaviour | environmental | ethical | fraud | illegal | investor | quarterly

CONTENT: Blog