How Widespread and Predictable Is Stock Broker Misconduct?

The Role of Gatekeepers in Capital Markets

“…Research evidence points to CEOs with prior criminal records being associated with aggressive financial outcomes in companies and even financial fraud (see, e.g., Davidson, Dey, and Smith [2015]). Several recent papers also examine the same FINRA data as Law and Mills [2019], and show recidivism in financial advisor misconduct (see, e.g., Egan, Matvos, andSeru [2017], McCann, Qin, andYan [2017]). These studies suggest that extra caution is in order when individuals with prior records of legal infractions or untrustworthy behavior are placed in positions of trust, as is the case with financial advisors.…”

Financial Gatekeepers and Investor Protection: Evidence from Criminal Background Checks

“…Several recent studies in finance and accounting examine misconduct in the financial advisory industry (Qureshi and Sokobin [], Griffin, Kruger, and Maturana [, ], Charoenwong, Kwan, and Umar [], McCann, Qin, and Yan [], Dimmock, Gerken, and Graham [], Cook et al. [], Egan, Matvos, and Seru [, ], Law and Zuo []).…”

“…First, unlike the combined misconduct measure in Egan, Matvos, and Seru [], which is primarily an ex post measure, our pre‐advisor criminal record is strictly an ex ante measure. Although previous papers, such as McCann, Qin, and Yan [], Egan, Matvos, and Seru [], and Dimmock, Gerken, and Graham [], study misconduct and criminal activities in the financial advisory industry, our paper explicitly focuses on pre‐employment criminal activities. Examining pre‐employment criminal activity is important to financial gatekeepers, as Egan, Matvos, and Seru [] show that advisors with misconduct simply switch their employment to other brokers and stay within the advisory profession.…”

“…In sweeping data‐mining exercises, Qureshi and Sokobin [] and McCann, Qin, and Yan [] find that, for each financial advisor, a criminal record in year t is one of the 12 or 22 variables that predict an arbitration award or settlement exceeding $10,000 or $15,000 in year t + 1, respectively. McCann, Qin, and Yan [] use gradient‐boosting machine models to evaluate the performance of various models based on BrokerCheck data.…”

“…Qureshi and Sokobin [] and McCann, Qin, and Yan [] use arbitration awards or settlements exceeding $10,000 or $15,000 as a proxy for investor harm. Dimmock, Gerken, and Graham [] use customer disputes that receive arbitration awards or settlements as a proxy for financial misconduct.…”