While under the leadership of a CEO with nonprofit or government experience, 21 of the 91 firms were involved in 33 restatements during the study period; by comparison, 14 control firms restated 16 financial disclosures during the same period. Stock returns following restatement announcements were also more negative for firms headed by CEOs with a nonprofit or government background. These firms saw their stock price drop more than 5 percent in the five days after a restatement, whereas control firms that restated suffered less than a 2 percent drop in that period.
The author notes that all but two of the 33 restatements for the test firms were revised negatively and writes, “If all restatements were a result of honest mistakes, we would expect roughly half to be in the favorable direction.… It appears that the vast majority of restatements arise from either intentional misrepresentations of the financial position or ‘aggressive accounting practices.’”
In terms of litigation, the firms led by CEOs with a nonprofit or government background were named more often in class-action lawsuits, but the difference appeared to be related to company size and value rather than the executives’ experience. However, stock returns following the announcement of the lawsuits were significantly worse for these firms, which saw their price drop almost 11 percent in the five-day window after a lawsuit was filed, compared with a 6 percent drop for the control firms.
Overall, the author found strong support for the accountability hypothesis, writing: “Since the non-profit [and government] sector is notorious for disorganization, bureaucracy, and chaos, it is likely to attract and/or mold individuals who have a higher probability of being involved in corporate mismanagement.” Although there may not be any fundamental differences in the characteristics of people who choose to work for nonprofits and in government, the author notes, they nonetheless might pick up bad habits or modes of conduct that prove deleterious in the corporate realm.
Firms led by CEOs with prior experience at nonprofit organizations or in government are more likely to restate their financial disclosures and suffer more negative stock returns in connection with class-action lawsuits — two important indicators of lax financial controls.