Managerial Self-determination and Securities Fraud

Abstract

Despite all the efforts to improve corporate governance, managers may not always act in the best interest of the owners of their firms. Their autonomy may give rise to behavior that is not approved by their firms’ owners or to behavior that is deemed fraudulent. Building on cognitive evaluation theory, we argue that monitoring and intervention by dedicated institutional investors and the pressure to meet analyst forecasts have an adverse influence on top managers’ perceived autonomy and perceived competence, decreasing their intrinsic motivation and increasing the likelihood of unethical behavior (measured by incidence of security fraud). In this regard we find that takeover defense provisions, as safeguard devices conducive to protecting top managers’ perceived autonomy, curtail the likelihood of committing securities fraud. In addition, we contend that high CEO power as a moderator reduces pressure from dedicated institutional investors and missed analyst forecasts to commit fraud. Such power also reinforces the negative influence of takeover defense provisions on fraud commitment. Using a sample of large U.S. companies, we find empirical support for most of our arguments.