CEO turnover and corporate governance changes following the revelation of bribery

The previous literature on bribery can be classified in three streams. The first stream has focused on measuring bribery at the country level, its determinants, and its impact on the country’s economic development. This literature measures bribery indirectly, by relying on questionnaires or indices of corruption perceptions at the country-level. The second stream analyzes firm-level data from surveys to determine how much firms pay as bribes, and what determines the size of bribes. Finally, the third - and smallest - stream of literature uses firm-level data derived from actual bribery incidents and focuses on the date of the revelation of the bribery.

The current study belongs to the third stream. Although bribery is likely to be a manifestation of poor corporate governance, there is no study that has examined the relationship between corporate governance and bribery. Managers may actively pursue (or turn a blind eye to) bribery by their subordinates, in the hope that they may reap the benefits of better firm performance, without facing personal cost if the bribery is revealed.

We plan to use data from real bribery incidents worldwide. Our research has three objectives. First, when the bribe was paid, we plan to compare the corporate governance of bribing firms with that of the remaining firms in the same market that have not been detected bribing. Corporate governance characteristics of interest are the composition of the board of directors, and the presence of large shareholders, especially institutional investors that may monitor managers.

Second, and most importantly, we plan to examine whether there are changes in corporate governance following the revelation of the bribery. Do CEOs lose their jobs? Are there changes in the composition of the board of directors? Do institutional investors sell the shares of companies that have behaved unethically? If top management do not face penalties, it may be an optimal strategy for them to turn a blind eye on their subordinates who pay bribes.

Finally, we will examine what determines whether there are such changes or not? Anecdotal evidence suggests that CEOs do not always lose their jobs following the revelation of bribery. For example, in the early 1990s, an Israeli general went to jail for receiving bribes by the U.S. firm General Electric (GE) for military jet aircraft engine contracts. The CEO of GE Jack Welch was not replaced. What determines whether the CEO loses the job or not?