Study May Provide First Real Proof Of How Tone at the Top Impacts Ethics

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By Yin Wilczek

March 27 — A soon-to-be-published study may provide the first empirical evidence that tone at the top really does matter.

The paper by three finance professors used a “novel” way of identifying suspect behavior—systematic participation in options backdating—and found that firms managed by chief executive officers who systematically backdate their option grants and/or exercises are more likely to perpetrate a financial reporting fraud and engage in questionable investment activities.

“I think the broad implications of our study are that a CEO’s personal character matters for a firm’s future and how that firm engages in business activity,” said study author Andy Puckett, a finance professor at the University of Tennessee.

‘Negative Consequences.'

“That might be `obvious’ to some, but I believe that this is the first real empirical evidence that we have that a CEO, who we argue would have suspect character, can produce significant negative consequences for the firms that they run,” Puckett told Bloomberg BNA March 27. “And so, one of the suggestions that we have at the end of the paper is that we think there should be a role for boards of directors and executive search firms in trying to identify CEOs of high character.”

The paper, “Suspect CEOs, Unethical Culture, and Corporate Misbehavior,” was co-authored by Lee Biggerstaff, an assistant finance professor from Miami University, and David Cicero, a finance professor at the University of Alabama. It is slated for publication in the Journal of Financial Economics.

Tone at the top has long been lauded as one of the foundations for effective corporate compliance. A recent Ethics Research Center survey found that even workers' perceptions of their supervisors' characters can impact a company's ethical culture.

Using data from 1992 to 2009, the study identified 249 CEOs who likely backdated at least 30 percent of their options. It added to the list 12 other CEOs who did not meet the options backdating criteria, but who were named in an enforcement action or backdating settlement.

Financial Fraud 

The study found that 8.82 percent of the firms managed by the identified CEOs were implicated in a financial fraud compared to 2.94 percent for control firms. It also found that these firms were more likely to overstate their profitability and engage in “suboptimal investment strategies.”

“Furthermore, these misbehaviors increase following a suspect CEO's arrival and are concentrated in firms that hire their suspect CEOs from the outside,” the study states.

In addition, the firms had a higher incidence of shareholder class actions—26.3 percent compared to 13.9 percent for the control group—and were 25.4 percent more likely to experience severe stock price declines of at least minus 40 percent during a market correction, the study found. It added that “outside-hire suspect CEOs are significantly more likely to be fired during the post-bubble period.”

The study acknowledged that not all may view options backdating as questionable, noting that “one could interpret our results with caution if they disagree with this characterization.”

Puckett told BBNA that he and his co-authors have not discussed future projects specifically related to the options-backing characterization, but “we are bouncing around this space.”

“So I’ll expect future projects related to this work,” he said.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The study is now available at


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