Why Do Executives Commit Financial Fraud? Executive Perquisites and Corporate Governance Implications

This paper examines whether executive perquisites and corporate governance forces are crucial factors in explaining the likelihood of fraud commitment. Although some studies contend that lavish perks may be harmful to firm value, our results support the incentive alignment view that granting perks help alleviate fraud commitment and such effect is especially strong for the offering of financial and severance perks. Further, in support of the agency theory, the likelihood of fraud is higher when a firm is managed by a powerful CEO, is lack of external monitoring, or is under large pressure for performance from external monitors. Overall, our results suggest that granting financial and severance perks to CEOs (and top executives), giving lower power to CEOs, and maintaining an adequate level of monitoring power may help limit the occurrence of fraud