Work‐from‐home and the risk of securities misconduct

• Published date: 01 September 2023
• Author: Douglas Cumming,Chris Firth,John Gathergood,Neil Stewart
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/eufm.12426

DOI: 10.1111/eufm.12426

ORIGINAL ARTICLE

Work‐from‐home and the risk of securities

misconduct

Douglas Cumming

1,2

|Chris Firth

3

|John Gathergood

3

|

Neil Stewart

4

1

College of Business, Florida Atlantic

University, Boca Raton, Florida, USA

2

Birmingham Business School,

University of Birmingham, UK

3

School of Economics, University of

Nottingham, University Park,

Nottingham, UK

4

Warwick Business School, University of

Warwick, Coventry, UK

Correspondence

Douglas Cumming, College of Business,

Florida Atlantic University, 777 Glades

Rd, Boca Raton, FL 33431, USA.

Email: cummingd@fau.edu

Abstract

In the wake of the global pandemic, a challenge for

CEOs and boards is to set a stakeholder‐acceptable

organizational balance between remote and traditional

office working. However, the risks of work‐from‐home

are not yet fully understood. We describe competing

theories that predict the effect on misconduct of a

corporate shift to work‐from‐home. Using internal

bank data on securities traders we exploit lockdown

variation induced by emergency regulation of the

Covid‐19 pandemic. Our difference‐in‐differences anal-

ysis reveals that working from home lowers the

likelihood of securities misconduct; ultimately those

working from home exhibit fewer misconduct alerts.

The economic significance of these changes is large.

Eur Financ Manag. 2023;29:1054–1077.1054

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wileyonlinelibrary.com/journal/eufm

EUROPEAN

FINANCIAL MANAGEMENT

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. European Financial Management published by John Wiley & Sons Ltd.

We owe thanks to the Editor, John Doukas, two anonymous referees, and to conference and seminar participants at:

2022 Annual Conference of the European Financial Management Association; University of Newcastle; the

Accounting, Accountability & Governance Conference at the Academy of Sustainable Finance; the Doctoral

Conference in Strategy, Corporate Governance, Innovation, and International Business at Leicester Business School;

the Florida Finance Conference at University of Florida; IIM Jammu's International Conference on Sustainable

Finance, Economics & Accounting in the Pre‐and Post‐Pandemic Era; and the Innovation, Issues and Technology in

Financial Markets Conference at RMIT, Melbourne. We also are grateful to Gennaro Bernile, Mustafa Caglayan, Casey

Dougal, Joel Houston, Andy Naranjo, Yuehua Tang, Jared Williams, and Jay Ritter for helpful feedback. Importantly,

we thank PA, NBH, WT, JM, and AC at the company in London, England, for providing comments on this draft,

sharing the proprietary data with us, and exchanging ideas and information that allowed this work to be carried out.

Note: the data were processed inside the company and are not available for replication or further research. The research

was funded by Economic and Social Research Council grant ES/V004867/1.

Our study makes an important step toward under-

standing the link between the balance of work

locations and the risk that comes with this tradeoff.

KEYWORDS

fraud, risk management, securities misconduct, surveillance,

work‐from‐home

JEL CLASSIFICATION

G12, G14, G18, K22

1|INTRODUCTION

The global Covid pandemic increased market risk (Ammann & Moerke, 2022; Battauz et al., 2021;

Cai et al., 2022;Chiuetal.,2023;Kindetal.,2022), reconfigured how and where employees

performed their work (Gregg et al., 2022), and did this at an extreme intensity (Adams‐Prassl

et al., 2022). Although work‐from‐home is now seen as a permanent part of business life (Barrero

et al., 2021), an online workforce raises issues that do not yet have solutions (Nyberg et al., 2021).

Corporate sectors unable to adapt well to remote working are associated with lower expected

revenue growth and worse stock market performance (Papanikolaou & Schmidt, 2022). Yet, CEOs

and boards have little hard evidence on how to strike an organizational balance between work‐from‐

home and traditional office working. Especially, management needs to create shareholder value

without exposing the firm to new, unacceptable risks. Prominent among these hazards, especially

for financial institutions, is the (unintended) creation of a work setting that might result in higher

chances of financial fraud and regulatory violations. More optimistically, new ways of working may

present growth opportunities, improved life balance for employees (Choudhury et al., 2022)and

potentially a reduction in risk. Understanding these trade‐offs is thus a critical concern, not only for

corporate executives but also for shareholders, regulators, policymakers and management scholars.

The costs of fraud are well documented. Firms in the US lose on average 22%–38% of their

equity value upon the revelation of fraud, which is mostly due to reputation loss (Karpoff

et al., 2008a). Individuals responsible for financial misrepresentation in the US lose their jobs in

93% of cases, face criminal penalties in 28% of cases, and jail sentences that average 4.3 years

(Karpoff et al., 2008b). Likewise, manipulation of stock market prices has real corporate finance

consequences, including a 7% reduction in patents and 25% reduction in patent citations

(Cumming, Ji, Peter, et al., 2020) and a 12% greater likelihood that mergers will be withdrawn

and a 25% reduction in merger premiums (Cumming, Ji, Johan, et al., 2020). Firms guilty of

misconduct have other costs beyond those already mentioned; ongoing corrective actions may

also be required to manage the negative effects of earlier misconduct (Hersel et al., 2019).

Paruchuri and Misangyi (2015) suggest that misconduct can have vicarious costs too; when one

firm reveals wrongdoing others in the sector suffer lower valuations.

Given these significant negatives, the effects of home working on unethical activity are a

topic of ongoing research. In this paper, we consider the case of securities trading. This is a

highly relevant market for studying the effect of work from home because it is at the same

time a market where home working is very feasible technologically, but also a highly

regulated activity and one with severe financial consequences of misconduct that might arise

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