Does Misconduct Spread Like A Disease?

December 14, 2018

Key Takeaways

Many individuals in the financial advisory industry who commit fraud are more likely to do so if they work with others who have engaged in misconduct in the past.

“Although only a small fraction of financial advisors ever commit fraud, many of the advisors who do are linked through their career paths. We ask why this pattern occurs — does misconduct spread like a disease?” Gatton College Assistant Professor of Finance Will Gerken asked this question in his research paper, “Is Fraud Contagious? Coworker Influence on Misconduct by Financial Advisors,” published in the Journal of Finance. “A big challenge for researchers trying to identify contagion is that people often choose to associate with others that have similar characteristics,” Gerken said. “Typically, it’s hard to disentangle contagion from a ‘birds-of-a-feather’ explanation. To get around this problem, we looked at mergers of financial firms that exposed some, but not all, employees to new coworkers with a history of misconduct.” A key finding by Gerken and his coauthors, Stephen Dimmock, associate professor at Nanyang Technological University, and 2016 UK doctoral graduate Nathaniel Graham, is that individuals in the financial advisory industry are more likely to engage in misconduct if they work with others who have engaged in misconduct in the past. Moreover, they find evidence that it is easier to transmit bad behavior than good. Typically, it’s hard to disentangle contagion from a ‘birds-of-a-feather’ explanation. “We find stronger contagion effects among coworkers of similar ethnicity, a proxy for the strength of their peer relationships. Importantly, we also still find significant effects across coworkers of different ethnicities,” Gerken said. “We often think about peer pressure affecting young people. Previous studies had focused on identifying peer effects among youthful offenders of street crime. Our study documents peer effects among white-collar professionals. Though we focused on financial advisors, I would not be surprised to see similar influence exhibited among other types of professionals such as doctors and lawyers.” Gerken was featured on NPR’s Marketplace Morning Report discussing the consequences his findings can have for companies. Listen to his interview here.

Is Fraud Contagious? Coworker Influence on Misconduct by Financial Advisors

Authors:

William Gerken, PNC Associate Professor of Finance, Gatton College of Business and Economics at the University of Kentucky 
Stephen G. Dimmock, Associate Professor of Finance, Nanyang Technological University, Singapore
Nathaniel P. Graham, Assistant Professor of Finance, A. R. Sanchez, Jr. School of Business, Texas A&M International University 

Publication:

The Journal of Finance, Vol. 73, Issue 3, pages 1417-1450, June 2018

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