Journal article

Corporate fraud and external social connectedness of independent directors

Yu Flora Kuang, Gladys Lee

JOURNAL OF CORPORATE FINANCE | ELSEVIER | Published : 2017

Abstract

We examine the effects of independent directors' external social connectedness on corporate fraud commission and detection. The results show that well-connected independent directors do not affect the likelihood of fraud commission but significantly reduce the likelihood of fraud detection given occurrence of a fraud. In particular, with a one-standard-deviation increase in independent directors' connectedness, the likelihood of fraud detection reduces by 22.5%. We also find that the consequences of fraud commission faced by firms with well-connected independent directors are less severe as fraud remains undetected for a longer period of time and fewer people are charged with fraud when inde..

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Funding Acknowledgements

The authors would like to thank Jeffry Netter (the Editor) and an anonymous reviewer. The authors gratefully acknowledge the helpful comments of Margaret Abernethy, Mary Barth, Steven Balsam, Neil Fargher, Anne Lillis, Stephan Hollander, Xinning Xiao, Reggy Hooghiemstra, Bo Qin, Chen Chen, Chung Yu Hung, and Wen He. The authors also thank all the seminar and conference participants at the University of Melbourne and 2016 AFAANZ Annual Conference on the Gold Coast for helpful comments. Yu Flora Kuang acknowledges the financial support from the 2016 Faculty Research Grant of the University of Melbourne.