Management Turnover and Corporate Governance Changes Following the Revelation of Fraud

Anecdotal evidence suggests that top managers of firms that are investigated or charged with criminal fraud lose their jobs. From a theoretical perspective, it is plausible that fraud scandals create incentives to change managers, in an attempt to improve the firm's performance, reinvest in lost reputational capital, or limit the firm's exposure to liabilities that arise from the fraud. It is also possible that fraud creates incentives to change the composition of the firm's board, to improve the external monitoring of managers or to rent new directors' valuable reputational or political capital.