The Research On The Relationship Between CEO-Director Connections And Corporate Fraud

While directors can be nominally independent of the CEOs, they could have social connections to CEOs through shared education or employment experiences or shared service at non-business organizations. These broader connections reflect social interactions of a type not captured in conventional measures of independence and we examine their relation to fraud. An extensive literature in economics argues that connections can affect economic outcomes. These effects are viewed as being positive or negative based on whether connections facilitate or constrain opportunistic behavior. For instance, a director may be more disposed towards favorable interpretations of actions or monitor less and cut additional slack for CEOs with shared educational backgrounds, which can lead to a slide down a slippery slope. On the other hand, prior professional relationships can facilitate a more intense advisory and collaborative relationship between the CEO and director, leading the CEO to desist from opportunistic behavior.Based on this unique perspective of CEO-Director connections, this article focuses on whether CEO-Director connections have an influence on financial disclosure and it can help directors provide better oversight in order to reduce financial fraud. On the basis of the summary of domestic and foreign research on the relationship between CEO-Director connections and corporate financial fraud, this article defines the scope of the study. Then, this article analyzes the mechanism of the influence of CEO-Director connections on corporate financial fraud using the theory of collaborative board, social capital theory and so on. This article will define the relationship of former colleagues between CEO and directors as professional relationships, the relationship of fellow between CEO and directors as non-professional relationships. The number “one” refers to companies who committed fraud, while the number “zero” refers to companies who did not commit fraud. Regression analysis is used to analyze 178 listed companies in Shanghai and Shenzhen Stock from 2010 to 2014 on CEO-Director connections and corporate fraud. The results show that professional relationships between CEO and directors have a significant negative correlation with financial fraud, namely professional relationships can reduce the likelihood of fraud; while non-professional relationships between CEO and directors have a significant positive correlation with financial fraud, namely non-professional relations- hips may increase the likelihood of fraud. Finally, based on the results, some suggestions such as making up the supervision and strengthening self-discipline are supplied towards the government, listed companies and CEO itself in order to reduce financial fraud. The main suggestions towards the government is that it should strengthen supervision towards CEO. On the other hand, the government should also achieve system innovation as well as define the responsibility of CEO and make a heavier penalty provisions towards CEO. The main suggestions towards listed companies is that it should innovate the mechanism of appointment and internal supervision and control, perfect the incentive mechanism towards CEO and directors. The suggestions towards CEO is that it should strengthen self-discipline, and raise integrity awareness.