Labor market consequences of accounting fraud

Purpose – This paper aims to examine the research questions: Do executive and non-executivedirectors face similar labor market penalties upon revelation of accounting fraud? Are all executivedirectors treated by markets as a homogenous group? Or, do executive directors who are top managersface stiffer penalties than other executive directors?Design/methodology/approach – Board membership of incumbent directors in US firms accused ofaccounting fraud are tracked for three years after the revelation. Two labor marketconsequences/penalties are considered. Probability of losing internal, own firm board seat is thelikelihood that incumbent directors leave the accused firm’s board upon accounting fraud revelation.The likelihood of losing at least one external board seat (outside directorship) is also examined. Bothunivariate tests and multivariate LOGIT regressions are used to conduct the analysis.Findings – Compared to non-executive directors, executive directors are more than twice as likely tolose own firm board seat and at least five times as likely to lose at least one outside directorship.Moreover, all executives, top or otherwise, appear to face similar tough penalties.Research limitation/implications – Accounting fraud is a rare event; this may limit the generality of thefindings. Results obtained from a US sample may be applicable to countries with well-developed capitaland labor markets. Results imply that the labor market for directors serves a vital function in the US-stylecorporate governance environment; labor market discipline provides at least some incentives for boardmembers, including non-employee directors and other executive directors, to perform their fiduciaryduties.Originality/value – This is the first study that utilizes a single corporate event to analyze the operation ofthe labor market across different categories of directors. Also, while studies have examined penalties ontop executives there is no evidence that other executives who also serve on the board of the accusedfirms suffer labor market penalties.