Do bosses do bad when the going’s been good?

Research by Aharon Cohen Mohliver and Emily C. Bianchi suggests CEOs are more likely to cheat in relatively prosperous times


In 30 seconds:

  • By examining historical stock-options backdating, research found a strong association between economic prosperity and CEO misconduct
  • Paper also found that economic conditions have a long-lasting effect on “fresh” employees and can change their ethical baseline
  • Other research suggests “recession graduates” tend to be more satisfied employees, remain with the company longer and are less narcissistic
  • New research suggests such graduates may also be more likely to behave ethically.

One might think, intuitively, that economic recessions are conducive to corporate misconduct. Governments rein in public spending, private-sector investment is harder to come by, consumer spending goes down and corporate profits shrink – all reasons why firms are likely to incur losses, and why the CEO might be tempted to break the rules to recover deficits.

And, if it is the case that bosses are more likely to engage in illegal behaviour when their businesses are feeling the pinch, the implied corollary is that in good times they are more ethical. Resources are plentiful in boom times – why cheat when you’re winning anyway?

Unfortunately, much recent history tells us that that is not necessarily so. In mid-1980s America, for example, rapidly increasing prosperity was accompanied by innumerable corporate scandals, including the epic failure of Lincoln Savings and Loan Association, which saw five US senators embroiled in a corruption scandal. By the end of the decade, more than half of all US savings and loans (S&L) banks had failed and more than 1,000 senior executives in the financial services sector were arraigned on federal indictments.

Undoubtedly, deregulation and ballooning speculative risk-taking contributed greatly to the S&L crisis. Similarly, the internet-fuelled boom of the late 1990s was accompanied by widespread financial misconduct by CEOs at major US corporations, including Enron, WorldCom and Tyco.

Twin hypotheses

On the obverse of the coin, people are generally more risk-averse and more alert to fraudulent behaviour of others. This would support the theory that bosses are less likely to resort to corporate misconduct in lean times.

This led to two hypotheses that Aharon Cohen-Mohliver and Emily C. Bianchi set out to test in a paper entitled ‘Do Good Times Breed Cheats? Prosperous Times Have Immediate and Lasting Implications for CEO Misconduct’, originally published in Organization Science in December 2016.

The first hypothesis was that CEOs will be less likely to utilise unethical business practices during bad economic times and more likely to do so during good economic times; the second was that economic conditions have a long-lasting effect on fresh employees – and actually change their ethical baseline.

Given the paper’s title, it will be readily apparent that the researchers did, indeed, find a strong association between economic prosperity and CEO misconduct.

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“CEOs who had begun their careers in a boom were more likely to cheat”

The design methodology

But how to show such an association empirically? What was truly original in the paper was the research setting and design methodology, given that offenders are hardly likely to self-report misconduct. To analyse CEO behaviour, Mohliver and Bianchi identified just over 2,000 CEOs of US publicly traded companies between 1996 and 2005 who received non-scheduled stock option grants, and gauged corporate misconduct by examining the likelihood that each stock option awarded during this time was backdated – “an unobtrusive indicator of unethical behaviour.”

Long considered highly unethical, if not outright illegal, options backdating is where a firm issues a stock option to a CEO on one date but the CEO reports to the regulator (in the US, the Securities and Exchange Commission (SEC)) that the option was assigned at an earlier date when the stock price was lower – thereby realising a greater gain on the options than if the date had been accurately reported. (Say, for example, the company issues the CEO with stock options on a day when its stock price is $100, but the CEO falsely reports that the options were issued a week earlier when the stock price was $80; the CEO nets the difference of $20 per share when they exercise the option).

Explicitly outlawed only in a 2006 SEC ruling, options backdating requires intentionally falsifying multiple financial documents that are submitted to investors and the SEC – an act that violates the law.

Identifying backdating, however, does not require that the firm involved is caught falsifying the documents. Because managers cannot predict whether the price of a stock will go up or down in the very short term, examining the price trends before and after a stock option grant is issued is a useful proxy for unethical behaviour – if the price drops until the date a grant is officially reported then rises in the following days, it is either an extremely lucky grant or a backdated one. Mohliver and Bianchi used instances of extreme luck as a proxy for cheating: if you think of the stock price within the possible reporting window as a lottery ticket, two CEOs in a hundred should have guessed the lowest price-point date. The data shows that, instead of two lucky winners, 15 CEOs managed to “guess” the date.

Mohliver and Bianchi created a benchmark of how likely it is that an option is truly lucky; an example is shown in Figure 1 using a grant reported by Gregory Reyes, CEO of Brocade in 2000, who became the first person to be convicted of fraudulent backdating of corporate stock options in August 2007. The option Reyes received would need to be very lucky indeed (within 5% of the luckiest possible dates for such an award). Based on the date the options were reported to the SEC, Reyes could have received the stock any time between 26 April and 7 June 2000. Brocade’s stock fluctuated substantially during that time, from a high of $182 in late April to a low of $119 in late May.

Testing hypothesis 2

To test hypothesis 2 – that CEOs who begin their career in prosperous times are more likely to backdate their stock option grant – the researchers collected information on the educational history of every CEO in the sample, including where they went to school, degree
and year of graduation, which they then matched with the prevailing unemployment rate at the time of their graduation. They then examined whether the CEOs who earned their highest degrees when the unemployment rate was particularly low (a proxy for good economic times) were more likely to backdate their stock options.

The findings

The findings were clear: even after adjusting for firm size, industry, number of options granted and other factors, CEOs graduating in the best economic times were around 30% more likely to falsify the issue dates of their stock options than those graduating in the worst times. In other words, CEOs who had begun their careers in a boom were more likely to bust the rules. By controlling for factors such as size of company led and type of industry, the authors were able to show that the prevailing conditions of their early careers predicted the CEOs’ propensity to falsely report stock option awards later in their careers, thereby lending support to their hypothesis that entering the workforce in prosperous times predicts later unethical behaviour.

Ruling out alternative explanations

But there is an alternative explanation to this finding: that individuals who enter the job market during a recession are different from those who choose not to do so. For example, when the economy falters, students who can afford to continue their education and wait until the market recovers do so, but those who cannot are forced to find a job. This can mean that economic conditions dictate who enters the job market, rather than influencing their perception of what is right and what is wrong.

The authors addressed this alternative by looking at the unemployment rate when the CEOs in their sample turned 22 (the common graduation age in the USA). They found that the unemployment rate at the age of 22 predicts future backdating – convincing evidence that the economic conditions at the time of graduation change CEOs’ ethical baseline. (It is, of course, impossible for anyone to “time” when they are born to coincide with economic booms exactly 22 years later.) If the economic conditions when turning 22 predict whether a CEO will backdate their stock option grants, this implies it really does change something about how these CEOs perceive what is right and what is wrong.

Mohliver is quick to highlight two limitations of the research. First, because the economic conditions during the period of time in question fluctuated only modestly, the test of Hypothesis 1 (that CEOs will be less likely to adopt unethical business practices during bad economic times and more likely to resort to them during good times) was partly constrained. Nonetheless, the fact that the research setting still generated significant results suggests that “even small economic changes can have meaningful implications for ethical behaviour, and large shocks may have even stronger effects on unethical behaviours.”

Second, there are other possible explanations for the results. As Mohliver says, while beginning one’s career in prosperous times may impact the “mental models that new entrants form about ethically acceptable practices and norms, our study does not elucidate the social and psychological processes that generate this effect.”

Broader implications

These limitations notwithstanding, the research has some novel and startling implications regarding likely contributory factors of corporate bad behaviour. Whereas research into the subject has tended to focus on how more direct factors such as financial incentives affect the likelihood of corporate leaders cheating, the findings highlight that indirect factors that are completely outside the firm’s agency can do so. In other words, the paper shows how something that happened 10 or even 20 years ago can permanently change ethical behaviours.

As Mohliver and Bianchi put it in their original paper, the research contributes to the growing understanding “of the mark that early career conditions can leave on later attitudes and behaviours” by suggesting that “strong, diffuse situations and experiences can shape ethical behaviour in the present and well into the future.”

The findings have implications beyond the realm of corporate governance in that they contribute to the understanding of how economic conditions and social norms are impacting each other. Mohliver says: “Past work on the formation of ethical systems has suggested that the family and educational institutions are the main influences in shaping individual moral values; these findings suggest that strong experiences outside childhood and formal education also influence the moral tendencies of corporate leaders.

“The paper also highlights the relative malleability of ethical behaviour to prevailing economic conditions – when the economy was doing well, all CEOs in our sample appeared more likely to backdate options, including those who began their corporate careers in a recession. This implies not only that early experiences appear to influence the ‘baseline’ propensity to cheat, but that economic conditions can move the baseline up or down.”

There are also implications for firms looking to identify recruits who may be more likely to behave ethically as employees. One could be to accord a positive weighting to “recession graduates”. Mohliver says: “Other research suggests that these graduates tend to be more satisfied employees, remain with their companies longer, and are less narcissistic as individuals – all attractive qualities in their own right. Our paper suggests that they may behave more ethically, too.”

‘Do Good Times Breed Cheats? Prosperous Times Have Immediate and Lasting Implications for CEO Misconduct’ is available at


Aharon Cohen-Mohliver is Assistant Professor of Strategy and Entrepreneurship at London Business School.

Emily C. Bianchi is Goizueta Foundation Term Associate Professor of Organization and Management at Goizueta Business School.


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