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Compliance

Corporate Headquarters Becomes Pawn in Regulator/Fraudster Chess Game: Study


Researchers argue that there is an ongoing game of cat and mouse between regulators and fraudsters where moving a company’s headquarters offers distinct advantages.

Executives focused on financial reporting fraud are more likely to move their corporate headquarters to a region with less regulatory scrutiny in  hopes of avoiding the fallout, according to a new academic study.

In fact, the researchers argue there is an ongoing game of cat and mouse between regulators and fraudsters in which moving a company’s headquarters offers distinct advantages.

“It’s like the cousin that gets in gambling debt with the mob and jumps town before they can catch up with him,” says Paul Calluzzo, assistant professor of finance at Queen’s School of Business in Toronto and co-author of the study. “When you are misbehaving, you are going to want to get out of town.”

According to the report titled “Catch Me If You Can: Financial Misconduct Around Corporate Headquarters Relocations,” firms with higher probability of conducting financial fraud are more likely to move their headquarters to a location where the regional U.S. Securities and Exchange Commission office has “less intense scrutiny against local firms.” The move is most likely to happen while the fraud is occurring, but before regulators have had a chance to respond through enforcement.

The phenomenon of gaming SEC jurisdictions is not overwhelming -- especially since only 1.5 percent of companies move headquarters location each year -- but the study argues it is real. It finds firm is 0.36 percent more likely to move when there is an “enforcement shock”  and that firms with high fraud scores are 0.5 percent more likely to relocate following a similar shock than those with low fraud scores.

“This result suggests that firms with higher likelihood of misreporting are more likely to relocate after observing a sudden large increase in [scrutiny] brought by the local SEC office,” the report states.

“When you are a CEO, your local SEC office is constantly looking over your shoulder so there is an opportunistic behavior that is created,” Calluzzo adds. “And after you move your misreporting behavior continues, but the increase of an SEC investigation does not.”

Calluzzo and his co-authors -- Wei Wang and Serena Wu -- stress that financial misreporting is just one of the factors among other well-justified factors for moving headquarters, such as tax considerations, growth concerns and proximity to peer firms.

“So the interpretation of the results is not that on average managers are bad behaving,” Calluzzo adds. “But rather that there are good managers who move for reasons that benefit shareholders and bad managers who move for reasons that benefit themselves.”