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Empirical investigation of the causes and effects of misconduct in the U.S. securities industry

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Thesis type
(Thesis) Ph.D.
Date created
I examine how individuals and organizations interact to cause and respond to misconduct. To improve identification of the causes and effects of misconduct, I build a dataset of the instances of misconduct of a sample of approximately 10,000 stockbrokers employed in 3,600 brokerage firms in the U.S. securities industry from the archives of the Financial Industry Regulatory Authority (FINRA) from 1974 to 2013. This dataset allows me to analyze both the individual and organization levels simultaneously. I first empirically investigate the long-standing question of "bad apples" (i.e., rogue individuals) versus "bad barrels" (i.e., rogue firms) which often arises in the aftermath of misconduct and examine how much of individual-level misconduct should be attributed to individuals versus their organizations. Addressing this question has implications for who to punish and how to avoid misconduct in the first place. Using the econometrics of linked employee-employer data, I find that persistent individual differences account for two to five times more of the variation in misconduct than do persistent organizational differences. I also find evidence for a mismatch on ethics (where ethical individuals match with rogue firms and unethical individuals match with ethical firms) and show that this mismatch on ethics explains up to 20% of variation in misconduct, outweighing the contribution of either of individual or firm differences. Second, I examine the long-term, rather than commonly debated and demanded short-term, consequences of misconduct and address the variation in who gets punished for misconduct. I find that customer-initiated misconduct is punished by the labor market, but regulator-initiated misconduct is not. I also show that higher tenure weakens the punishment after customer-initiated misconduct but it strengthens the punishment after regulator-initiated misconduct. I also find evidence that male brokers later in their careers are punished more for customer-initiated misconduct and punished less for regulator-initiated misconduct than female brokers later in their careers. Third, I analyze repeat firm-level misconduct and address why some firms learn and change after misconduct while others do not. Using negative binomial models, I find that firm-level misconduct increases with past misconduct, but this relationship is weakened the longer is the elapsed time since last misconduct.
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Scholarly level
Supervisor or Senior Supervisor
Thesis advisor: von Nordenflycht, Andrew
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