

The perils of bling. (Tomohiro Ohsumi/BLOOMBERG)

We examine how executives’ behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”)...we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.

Big-spender CEOs also tend to run companies that take bigger risks, but have poorer performance and are more likely to go bankrupt: