Should Firms be Allowed to Indemnify Their Employees for Sanctions?

Mullin, Wallace P.; Snyder, Christopher M.

doi:10.1093/jleo/ewn027

Cited by 31 publications

(13 citation statements)

References 31 publications

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“…Forbidding indemnifi cation removes an instrument that would be used in a contract to induce crime. Nevertheless, Mullin and Snyder (2009) show that forbidding indemnifi cation is socially ineffi cient. The result follows from employee risk aversion.…”

Section: Agent Indemnifi Cationmentioning

confidence: 99%

Corporate crime

Mullin¹,

Snyder²

2017

Encyclopedia of Law and Economics

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Section: Agent Indemnifi Cationmentioning

confidence: 99%

Corporate crime

Mullin¹,

Snyder²

2017

Encyclopedia of Law and Economics

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“…Collusion may cause managers a non‐monetary, per‐period opportunity cost κ that is not incurred when competing or deviating. This dis‐utility is modeled as an opportunity cost parameter that is additively separable from the utility gained from profits (Mullin and Snyder, ; Krupka and Weber, ; Huck et al, ) as is shown by Equation .

u_{k, κ} = u ((),,, s, k, k) - κ

…”

Section: Modelmentioning

confidence: 99%

Antitrust Compliance: Managerial Incentives and Collusive Behavior

Paha

2017

Manage Decis Econ

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This article analyzes a manager's incentives to establish and sustain an illegal collusive agreement if her firm is subject to profit shocks, if her utility function is concave in profits (e.g., because of risk aversion), and if she incurs opportunity costs (e.g., by violating a social norm). The model supports the empirical observation that if collusion is to be established and sustained in a state with low profits, then this state must be quite persistent. It also indicates that compliance with antitrust laws can be ensured best by combining a zero tolerance policy with a strategy of forgiveness.

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“…For instance, outcome-based contracts as a means to mitigate the behavior-verification problem (Eisenhardt, 1989) can increase the expected benefits of crime by incentivizing agents to use whatever tactics necessary, including illegal ones, to achieve performance goals (Ordóñez, Schweitzer, Galinsky, & Bazerman, 2009). Conversely, contractual clauses intended to mitigate agents' (i.e., managers') presumed aversion to risk (Eisenhardt) can decrease the expected costs of crime, particularly when they indemnify agents against sanctions for criminal activity (Margulies, 2006;Mullin & Snyder, 2010;Orland, 1979). In sum, attempts to resolve classic agency problems may unintentionally induce another: corporate crime.…”

Section: Corporate Crime As An Agency Problemmentioning

confidence: 99%

Reexamining the Cost of Corporate Criminal Prosecutions

Pierce

2015

Journal of Management

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Agency theory foments the expectation that corporate criminal prosecutions mitigate crime by inducing firms to self-regulate. Whether this bears out in reality remains a topic of contentious debate. Although the U.S. government began prosecuting firms over a century ago, insufficient empirical evidence exists to determine how the costs of prosecutions actually affect firms. Moreover, the limited empirical record tells a surprising and somewhat confusing story. Scholars of management and related disciplines have consistently found that criminal convictions have negligible impacts on shareholder wealth despite theoretical expectations to the contrary. To explain these surprising findings and better understand how firms experience the costs of prosecutions, I apply agency theory to the criminal prosecution process and propose that each legally defined action in that process communicates unique information regarding potential and actual agency costs (i.e., sanctions). I also propose that formal convictions appear to elicit no reaction from principals because firm responses to early events in the prosecution process, what I call "conviction harbingers," foretell unfavorable verdicts and sanctions well before courts make them official. Findings derived from a sample of 177 cases largely confirm my expectations by showing that prosecutions cause firm value to decline nearly 11%. In addition to exceeding previous estimates by a factor of three, this amount exceeds direct fines by a factor of five (i.e., shareholders lost more than $5 of wealth for each dollar of sanctions). I conclude by outlining implications of these findings for agency theory, corporate governance, policy, and practice.

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Should Firms be Allowed to Indemnify Their Employees for Sanctions?

Cited by 31 publications

References 31 publications

Corporate crime

Corporate crime

Antitrust Compliance: Managerial Incentives and Collusive Behavior

Reexamining the Cost of Corporate Criminal Prosecutions

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