Supervisor Influence on Employee Financial Misconduct

Abstract

We study the influence of supervisors on financial misconduct at branches of broker-dealer firms. Individual supervisor fixed effects explain twice as much variation in branch misconduct as firm fixed effects. We find similar evidence when we study supervisors switching firms following mergers or branch closures that are unrelated to misconduct, indicating our results are not spuriously generated by endogenous mobility bias. Supervisors affect misconduct through their personnel decisions, attention to employees with past misbehavior, and industry rules and ethics training. Our paper is the first to explore the supervisor’s role, distinct from firm-level factors, in influencing financial misconduct.

Keywords: financial misconduct; information asymmetries; investment advisers; organizational economics; delegation

JEL Classification: D14; D18, G20, G24, G38, J44, L22; M53