Labor Market Consequences for Non-Implicated CFOs in Fraud Firms: Investigating Relative Blame and Nuanced Contagion Effects

We explore labor market consequences for CFOs employed by fraud firms, focusing on contagion effects of blame for CFOs who are not implicated, i.e., not publicly blamed by the SEC for committing the fraud. Studying these individuals is important because they are associated with the fraud, so it is legitimate to question the quality of their governance oversight, and there may exist a lingering suspicion of potential involvement. Further, the labor market serves as a complementary oversight mechanism to ensure the integrity of the capital markets, so understanding how that market operates is important. We compare these non-implicated CFOs to two control samples: CFOs who are implicated and CFOs at non-fraud firms. Using hand-collected social media data, we track consequences for these groups from the fraud event through 2015. We find evidence consistent with the organizational disequilibrium hypothesis, whereby the vast majority of implicated CFOs exit their respective firms following the fraud, but about two-thirds of non-implicated CFOs still experience turnover. Only half of the non-implicated CFOs obtain employment in positions of comparable status in their subsequent three roles. To investigate the nuances of this contagion, we compare the employment status of non-implicated CFOs to that of non-fraud firm CFOs. We find that only about half of the CFOs from both groups achieve comparable employment status in the long run. Taken together, our results reveal close scrutiny of all CFOs who display labor market movements across firms regardless of the underlying reason for their turnover.