Research from Rice Professor Aims to Reduce Corporate Fraud

Robert Hoskisson, professor of management at the Rice University – Jones Graduate School of Business recently published a paper proposing an idea to predict financial fraud.

Concern over company managers committing fraud is an understandable and widespread issue, especially since the 2008 financial criss. Until now, research has largely suggested that the presence of external governance mechanisms should reduce the likelihood that a manager will attempt fraud, since they are more likely to be caught. Hoskisson’s research, however, looks at the issue from a new perspective.

Hoskisson’s work uses the cognitive evaluation theory, which states that too many outside restrictions can have a negative impact due to each person’s need to feel a level of self-determination. In order to determine if this theory also applies to top managers, Hoskisson and his team looked into regulatory data from 1999 to 2012. In particular, they were focused on institutional investors, the threat of corporate takeover and rating agencies as the external governance mechanisms.

In most cases, the data did not corroborate the belief that increased governance limits fraud. In the case of dedicated investors, higher levels of institutional ownership was actually connected to higher levels of fraud. In high-pressure situations such as a corporate takeover or agency ratings, the higher pressure placed on a company was related to an increase in fraud.

Hoskisson’s research does not present a tidy conclusion in how to prevent and limit financial fraud, but does introduce some interesting considerations as companies make decisions about the level of corporate governance they plan to introduce. Although managers must be held accountable for their actions, the research finds that too much governance can threaten their agency and result in increased levels of fraud.

regions: Houston

About the Author