Is Fraud Contagious? Co‐Worker Influence on Misconduct by Financial Advisors

Is Fraud Contagious? Co‐Worker Influence on Misconduct by Financial Advisors

  • STEPHEN G. DIMMOCK
  • WILLIAM C. GERKEN
  • NATHANIEL P. GRAHAM

Article first published online: 3rd February 2018 DOI: 10.1111/jofi.12613

Abstract


Using a novel data set of U.S. financial advisors that includes individuals' employment histories and misconduct records, we show that co‐workers influence an individual's propensity to commit financial misconduct. We identify co‐workers' effect on misconduct using changes in co‐workers caused by mergers of financial advisory firms. The tests include merger‐firm fixed effects to exploit the variation in changes to co‐workers across branches of the same firm. The probability of an advisor committing misconduct increases if his new co‐workers, encountered in the merger, have a history of misconduct. This effect is stronger between demographically similar co‐workers.

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