Abstract
Using a proprietary dataset of 667 companies around the world that experienced white-collar crime we investigate what drives punishment of perpetrators of crime. We find a significantly lower propensity to punish crime in our sample, where most crimes are not reported to the regulator, relative to samples in studies investigating punishment of perpetrators in cases investigated by U.S. regulatory authorities. Punishment severity is significantly lower for senior executives, for perpetrators of crimes that do not directly steal from the company and at smaller companies. While economic reasons could explain these associations we show that gender and frequency of crimes moderate the relation between punishment severity and seniority. Male senior executives and senior executives in organizations with widespread crime are treated more leniently compared to senior female perpetrators or compared to senior perpetrators in organizations with isolated cases of crime. These results suggest that agency problems could partly explain punishment severity.
Highlights
Studies of white-collar crime conclude that it has a significant economic impact.1 The Federal Bureau of Investigation estimates that it costs the U.S more than $300 billion per year, far exceeding losses from personal property crimes.2 In addition, white-collar crime can destroy shareholder value at host companies, as demonstrated by the experiences of Enron, Worldcom, Adelphia, Siemens, and Volkswagen and documented in prior studies.What is less clear is how punishments are meted out to perpetrators of white-collar crime
Punishments are lighter for perpetrators of crimes that do not directly steal from the company, and at larger companies where it is more likely to be important to send a strong message that crime does not pay
Some companies appear to report crimes to regulators and make decisions on punishments that are uncorrelated with factors reflecting economic costs and benefits, consistent with following a zero tolerance policy for white-collar crime
Summary
Studies of white-collar crime conclude that it has a significant economic impact. The Federal Bureau of Investigation estimates that it costs the U.S more than $300 billion per year, far exceeding losses from personal property crimes. In addition, white-collar crime can destroy shareholder value at host companies, as demonstrated by the experiences of Enron, Worldcom, Adelphia, Siemens, and Volkswagen and documented in prior studies (see Karpoff and Lott 1993; Dechow, Sloan and Sweeney 1996; Alexander 1999; U.S General Accounting Office 2002; and Karpoff, Lee, and Martin 2008a). The severity of punishment for white-collar crime is likely to reflect both economic considerations and managerial self-interest To further understand these effects for our sample firms, we examine the relation between punishment decisions and a variety of transaction, perpetrator, and company factors for which data is available. If agency costs are higher at large listed firms, where ownership and control are separate, executives responsible for punishing white-collar crime may opt for less severe penalties to reduce the risk of personal reputation loss should the crimes become public. Findings of more severe penalties for senior executives and employees at large listed companies are consistent with a cost-benefit analysis where management values sending a strong message to employees that white-collar crime is not tolerated. Executives could settle on punishments that reduce the risk of publicizing crimes to protect their own job security and reputations
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