Management Entrenchment and Corporate Fraud

• In Event: Breakfast with Research Roundtable Forum Session
  In Paper Session: Roundtable 4: Financial Accounting III

Abstract

Researchers and practitioners are divided over the impact of management entrenchment on corporate governance, managerial opportunism, and shareholder wealth. Proponents of management entrenchment contend that the entrenchment strengthens the corporate governance mechanisms of the firm, aligns the interest of managers with those of the shareholders, and curtails managerial opportunism via the strengthening of managerial job security, weakening of the threat of corporate takeover, and curbing of managerial myopia. However, opponents contend that the entrenchment weakens the corporate governance mechanisms of the firm, misaligns the interest of managers with those of the shareholders, and encourages managerial opportunism by insulating managers from the threat of removal, and weakening the effectiveness of board oversight over the managers. Using the Bebchuk, Cohen, and Ferrell (2009) entrenchment index (E-Index) as a proxy for the quality of corporate governance, and backdating as a proxy for corporate fraud, we examine the relationship between management entrenchment and Corporate Fraud. We conduct our analysis using logistic regression and identify a positive relationship between the propensity to backdate and the entrenchment index. Our results suggest that management entrenchment, measured by the number of antitakeover provisions adopted by a firm, appears to provide opportunities to managers to engage in fraudulent behavior. Such behavior could be inimical to the wealth of shareholders in the long run.

Authors

• Nana Yamfo Amoah, Rollins College

• Isaac Ankonu Bonaparte, Towson University

• Rajib Chowdhury, Old Dominion University