Connelly, 2020

924119
research-article2020
JOMXXX10.1177/0149206320924119Journal of ManagementConnelly et al. / Searching for a Sign
Journal of Management
Vol. XX No. X, Month XXXX 1–32
DOI: https://doi.org/10.1177/0149206320924119
10.1177/0149206320924119
© The Author(s) 2020
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Searching for a Sign: CEO Successor Selection in

the Wake of Corporate Misconduct
Brian L. Connelly
Auburn University
Wei Shi
University of Miami
H. Jack Walker
Auburn University
Matt C. Hersel
Clemson University
We theorize about board decision making by introducing image theory, a descriptive theory of
selection for decisions of more than routine importance, to research on CEO successor selec-
tion. We contend that directors’ current and future images of the firm typically revolve around
their main responsibility, maximizing shareholder wealth. However, following discovery of
misconduct, those images shift to the misconduct and to how it might be prevented. As such,
ethical leadership dominates their criteria for a CEO successor. Evaluating candidates’ moral
principles is nontrivial; there are few observable indicators. We develop arguments that, follow-
ing organizational wrongdoing, directors are more likely to choose a CEO successor with a
degree from a religiously affiliated university than they would under other conditions. We also
find their intuition is correct: Choosing a CEO with a degree from a religious university reduces
the likelihood of misconduct. In moderating analyses, we uncover a hidden irony: Directors in
industries where misconduct is common are the least likely to choose, but the most likely to need,
a CEO with a degree from a religious university. Results from analyses of S&P 1500 firms and
a policy capturing study of actual directors support our hypotheses.
Keywords: succession; boards of directors; cognitive perspectives; corporate governance
Corresponding author: Brian L. Connelly, Auburn University, 415 W. Magnolia Ave., Auburn, AL 36849, USA.
E-mail: bconnelly@auburn.edu
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2 Journal of Management / Month XXXX
Management researchers have long sought to understand successor selection in the event
of CEO turnover (Kunisch, Menz, & Cannella, 2019), with recent studies devoting particular
emphasis to the special circumstance of CEO successor selection following corporate mis-
conduct (Connelly, Ketchen, Gangloff, & Shook, 2016; Gomulya & Boeker, 2014). CEO
turnover is common after the occurrence of misconduct (Arthaud-Day, Certo, Dalton, &
Dalton, 2006), but the firm’s bad behavior complicates the question of who should be the
next CEO (Gomulya & Mishina, 2017). Studies on the topic have yielded important insights,
relying largely on signaling theory and symbolic management to explain decisions about
choosing a CEO successor in the aftermath of misconduct (Gangloff, Connelly, & Shook,
2016; Gomulya, Wong, Ormiston, & Boeker, 2017).
Much of this work focuses on the initial reactions and impressions of external evaluators.
We introduce image theory (Beach, 1993) to this literature, which allows us to develop argu-
ments about the decision process directors undergo when making their choice of a CEO suc-
cessor. Image theory is a descriptive theory of selection for “decisions of more than routine
importance” (Beach & Mitchell, 1987). This theoretical perspective provides a way of under-
standing decision making that is not simply a degenerative version of expected utility maxi-
mization but, rather, is based on the evaluation of key cognitive schemata, or images (Miller,
Galanter, & Pribram, 1986). In the wake of misconduct, ethical norms of behavior become
especially salient and shape directors’ images about the company’s desired future state (i.e.,
one without misconduct) and the strategy for achieving it (i.e., hiring a CEO with high ethical
standards). Finding a candidate who aligns with directors’ image of the ethical way the firm
should operate going forward is daunting, because it is difficult to assess characteristics
about integrity via externally observed factors (Morgeson, Campion, Dipboye, Hollenbeck,
Murphy, & Schmitt, 2007).
To find a CEO successor that directors believe will successfully bring the firm toward a
future state characterized by ethical business practice, they may look for clues about candi-
dates’ moral values (Haselhuhn & Wong, 2012). Ethical theorists describe this as a process
of deontological evaluation, or judging the extent to which candidates believe there is inher-
ent good and bad in their actions, separate from the consequences of those actions (Laczniak
& Murphy, 2006). There are many possible foundations of moral judgment, but scholars
commonly acknowledge personal religiousness is an observable social factor that is closely
linked to perceived ethical behavior (Parboteeah, Hoegl, & Cullen, 2008). Directors are
unlikely to know the religious practices of candidates, but those that attended religiously
affiliated universities communicate information about their religiosity (Lyon, Beaty, &
Mixon, 2002). We, therefore, investigate the extent to which directors at firms that engaged
in financial misconduct replace the CEO with a successor who has a degree from a university
with an active religious mission.
Our work makes several contributions to the literature. First, we shift research on the suc-
cession decision from information economics to the way directors view the firm and what
they envision for it. Discovery of misconduct puts directors in a precarious situation that
affects their decisions, and few have delved into trying to understand directors’ thought pro-
cesses in this situation. Second, we examine the extent to which the strategy of hiring a CEO
with a degree from a religious university reduces misconduct (Dyreng, Mayew, & Williams,
2012; Hilary & Hui, 2009). Interestingly, our results show that directors of firms that operate
in industries where misconduct is a relatively common occurrence are the least likely to
Connelly et al. / Searching for a Sign 3
choose, but the most likely to benefit from, a CEO with a degree from a religious university.
Third, we build on recent studies that explore the extent to which a CEO’s early life experi-
ences affect corporate outcomes (Bernile, Bhagwat, & Rau, 2017; Kish-Gephart & Campbell,
2015; Martin, Côté, & Woodruff, 2016).
Conceptual Development
Image Theory
Image theory describes how individuals make decisions (Beach, 1993). This theory stands
in contrast to normative models of choice based on economic theory, which are often criti-
cized for not representing the way decisions are actually made (Beach & Lipshitz, 2017). In
the image theory framework, there are three different schematic knowledge structures that
aid in choosing the best-fitting option in a choice set. The first is the value image, which lays
the foundation for all decisions because it is composed of “self-evident truths about what [a
decision maker], or the group or organization, stands for” (Beach & Connolly, 2005: 161).
The value image includes the principles that are important to the decision maker. These prin-
ciples inform the trajectory image, which consists of the decision maker’s goals and vision
of an ideal future state. Third is the strategic image, where the decision maker matches goals
from the trajectory image with a plan for goal attainment.
A decision maker uses the value, trajectory, and strategic images to make adoption deci-
sions (and progress decisions, but those are not the focus of this study). Adoption decisions
involve whether to add constituents to any of the three aforementioned images. For example,
the process of choosing a CEO successor is an adoption decision in which a constituent is
added to the strategic image in the hope of helping an organization reach a desired future
state. As CEO candidates are evaluated, there is an assessment of their compatibility with the
organization’s principles, goals, and existing strategic plans. This evaluation is a two-step
process (Donnelly & Quirin, 2006). The first step is screening, where the decision maker
eliminates options that are clearly incompatible with what they envision for the firm
(Sekiguchi & Huber, 2011). The second step is profitability, where the decision maker
chooses the most promising option among survivors of the screening phase, based on com-
patibility with their images of the firm.
Under normal operating conditions (i.e., absent revelations of misconduct), directors
would likely create images about the firm that revolve around their main responsibility,
which is to provide a return to shareholders. Their value image, therefore, would center on
issues of performance, such as the firm’s productivity, growth, or profitability. Principles that
reflect how the firm competes, such as their innovativeness (e.g., Tesla), efficiency (e.g.,
FedEx), or corporate culture (e.g., Southwest Airlines), underscore key aspects of directors’
value image (Schaffer, 2002). Their value image could also encompass moral principles,
such as transparency and truthfulness, but competitive characteristics that have proven suc-
cessful are likely to dominate. Directors are also likely to have a performance-based trajec-
tory image where they define the future of the firm in terms of their position in the competitive
marketplace. More often than not, trajectory images are optimistic because directors expect
positive outcomes and are sanguine about the firm’s future (Fiske & Taylor, 2008).
Conforming behavior remains largely unnoticed, so under normal operating conditions, there
would be little reason for directors to question the firm’s moral principles.
Successor Selection
In this article, we are concerned with firms that have engaged in misconduct, which is the
“organizational pursuit of any action considered illegitimate from an ethical, regulatory, or
legal standpoint” (Harris & Bromiley, 2007: 351). The revelation of corporate misconduct
forces directors to reconsider their images in view of recent expectancy violation (Floyd &
Voloudakis, 1999). When firms and their managers deviate from commonly held expecta-
tions, it sends a shock that creates cognitive dissonance for directors, forcing them to attend
to their images and recalibrate their expectations about the firm’s future state (T. Lee &
Mitchell, 1994).
In this situation, framing becomes an essential part of the decision-making process.
Framing describes the process of sensemaking, where the decision maker interprets the deci-
sion in view of the context in which they must make it (Beach, Puto, Heckler, Naylor, &
Marble, 1996). Through framing, individuals can reduce the cognitive demands associated
with decision making by focusing on relevant image components. Framing determines the
salient aspects of the value image that drive the decision-making process (De Martino,
Kumaran, Seymour, & Dolan, 2006). For example, directors at HealthSouth were thinking
about the ethics component of the value image after the CEO, Richard Scrushy, had engaged
in a multibillion-dollar accounting scandal from 1996 to 2002. Directors at Qwest Diagnostics
likely had a similar reaction when they learned that their CEO, Joseph Nacchio, engaged in
insider trading, illegally selling more than $50 million in stock in 2001.
As directors reassess the firm’s images in the wake of misconduct, we suggest that the moral
principles under which the firm operates become especially salient. Moral principles refer to
conduct associated with perceptions of right and wrong (Ambrose, Arnaud, & Schminke,
2008). Following organizational wrongdoing, the firm’s moral principles rise to the fore as a
key element of their value image. With a focus on ethics, directors are likely to adopt a new
trajectory image that includes conducting future operations with high moral standards.
One way for directors to focus on the ethical component of their value image and realize
their new trajectory image of avoiding future misconduct is to appoint a new CEO with high
moral standards. This, however, presents a problem: How can directors ascertain the morals
of candidate CEO successors? This is difficult because candidates’ moral principles are not
readily measured or outwardly visible. Directors and candidate CEOs operate in many of the
same social circles, so directors will have extensive information about candidates, but reli-
ably assessing their ethics is extremely challenging. Some have advocated for the use of
integrity testing during selection, but the validity of such techniques is questionable at best
(Morgeson et al., 2007). In the absence of reliable information about a candidate’s moral
standards, directors may search for cues that reveal something about a candidate’s ethics
(Gomulya et al., 2017).
There are many motivations for moral behavior. One means by which individuals make
assumptions or draw inferences about someone’s ethical standards is by evaluating their
personal religiousness (Giacalone & Jurkiewicz, 2003). An indicator of personal religious-
ness is whether the candidate holds a degree from a religiously affiliated university.
Information about where they attended university is a central feature of all CEO candidates.
Schools such as Brigham Young University and Baylor have decidedly religious objectives,
and many students self-select into such institutions, at least in part, as a reflection of their
religiousness. Students can enhance their experience at these schools if they are willing to
comply voluntarily with the norms of behavior of the denomination, and they are less likely
to make it through to graduation if they outwardly oppose those standards (Scott, Bailey, &
Kienzl, 2006).
This is important because directors do not have wide variance in their pool of candidates
with respect to ethical violations (i.e., they do not have candidates with good and bad reputa-
tions). Rather, they face a candidate pool where, in all likelihood, all the individuals have no
obvious record of organizational wrongdoing. If candidates have a history of prior ethical
violations, or if reference checks reveal questions about moral standards, those individuals
would not even pass the initial screen. Acquiring information related to the moral standards
of those surviving the initial screening is likely difficult because there are few external indi-
cators of integrity (Gomulya et al., 2017). For this reason, they must look deep to discern the
candidates’ enduring ethical principles during the profitability stage of decision making, and
there are few mechanisms for doing so.
These arguments suggest that directors choosing a new CEO after the firm has engaged in
misconduct may consider whether candidates have a degree from a religious university.
HealthSouth is a good example, as it brought in Jay Grinney, a graduate of Saint Olaf College
(Lutheran) following its aforementioned accounting scandal. Such candidates align well with
the ethics component of directors’ value image and their revised trajectory image in view of
the recent misconduct (Donnelly & Quirin, 2006). We are not suggesting that a degree from
a religiously affiliated university is necessarily the most important characteristic used by
boards in making a succession decision. Rather, we argue that it becomes increasingly impor-
tant in the wake of misconduct as opposed to under normal conditions. Therefore, we hypoth-
esize the following:
Hypothesis 1: When choosing a CEO successor, directors are more likely to select a candidate with
a degree from a religiously affiliated university if the firm had previously engaged in misconduct
than they are if the firm had not engaged in misconduct.
There may be scenarios where misconduct is more, or less, common than other scenarios.
Directors operate in a wide variety of industry environments, and ethical norms of behavior
vary by industry (Greve, Palmer, & Pozner, 2010). For example, in industries such as finan-
cial services, health care, and construction, managerial misbehavior is far more common than
the average for all industries. In fact, some have found that firms in financial services account
for as much as 17% of all cases of fraud (Association of Certified Fraud Examiners, 2017),
perhaps because it is easier to move money around on balance sheets than it is to engage in
fraud when specific assets are at stake. Other industries, such as education, insurance, and
wholesale trade, rarely see instances of fraudulent behavior.
In industries where misconduct is comparatively common, the gap between managerial
misbehavior and the behavior that directors expect is not as great as in industries where
misconduct is rare (Gomulya & Mishina, 2017). When misconduct is common in the indus-
try, expectancy violation is not high, so directors are not likely to reevaluate the principles
associated with their value image as a result of the misconduct (Beach & Mitchell, 1990).
Instead, other aspects of the value image (e.g., those associated with performance or rela-
tionship building) could play a more prominent role. In these circumstances, the CEO suc-
cession decision is not as likely to be framed around misconduct as it is around other
organizational objectives.
We predict that directors are less likely to be attuned to cues about candidates’ moral stan-
dards when they are choosing a new CEO in an industry where misconduct is relatively com-
mon compared to industries where misconduct is rare. The legitimacy of firms that engage in
misconduct in high-misconduct industries is not in as much jeopardy as those who do so in
low-misconduct industries, because legitimacy is defined by adherence to industry norms of
behavior (Zimmerman & Zeitz, 2002). Therefore, the need for preventing future acts of mis-
conduct may be less problematic in industries where misconduct is relatively common, as
opposed to those where misconduct is rare. In high-misconduct industries, a degree from a
religious university is not likely to make a strong impact on succession decisions. This leads
us to hypothesize the following:
Hypothesis 2: The positive relationship between corporate misconduct and choosing a CEO succes-
sor with a degree from a religiously affiliated university is weaker in industries where miscon-
duct is common than it is in industries where misconduct is rare.
Religiosity and Misconduct

One common denominator of studies on CEO successor selection following misconduct
is that they do not investigate the supposed benefits of the firm’s successor choice. Most
studies on this topic examine investor reactions to the board’s choice of successor (Gangloff
et al., 2016; Gomulya et al., 2017), but few consider the consequences of making a particular
choice.
There is some evidence to support the notion that religiousness is actually associated with
high morals and ethical behavior (Kolodinsky, Giacalone, & Jurkiewicz, 2008; Neubert,
Bradley, Ardianti, & Simiyu, 2017), in addition to perceptions of ethicality as we argued in
our first hypothesis. For example, McCullough and Willoughby (2009) proposed that reli-
giousness promotes self-control, influences self-regulation, and enhances self-monitoring.
Subsequent empirical research has, in part, confirmed these propositions (Rounding, Lee,
Jacobsen, & Ji, 2012), but the body of empirical research on this issue reveals mixed findings
(Chan-Serafin, Brief, & George, 2013; Longenecker, McKinney, & Moore, 2004; Rounding
et al., 2012). Thus, it is unclear whether and when the association of perceived religiosity and
ethical behavior holds.
Weaver and Agle (2002) add a measure of clarity by introducing a symbolic interactionist
perspective. These authors describe how the empirical inconsistencies scholars observe may
arise because religion influences peoples’ self-identity in different ways, depending on how
people define themselves in terms of the roles they serve (e.g., spouse, parent, employee).
Individuals arrange each identity in a hierarchy so that the highest identities are the most
salient and most influence one’s behavior (Stryker & Serpe, 1982). Religious affiliation may
not necessarily affect behavior if the religious level of identity is not at or near the top of an
individual’s self-identity hierarchy.
These authors go on to suggest that a key factor that can influence where individuals
might situate religious identity in the self-identity hierarchy is their religious motivational
orientation. Those who are intrinsically motivated are likely to live according to the pre-
scribed morals of their religion (King & Crowther, 2004). Those who are extrinsically moti-
vated view religion as a means for achieving social or economic goals. Recent studies support
this distinction, as scholars have shown that individuals with intrinsically motivated reli-
giousness exhibit positive characteristics typically associated with religiousness, more so
than those who are extrinsically motivated (Stavrova & Siegers, 2014; Walker, Smither, &
DeBode, 2012).
We argue that the decision to attend a religiously affiliated university could be an indicator
of an individual’s intrinsic motivation for religiosity (Weaver & Agle, 2002). Religious uni-
versities impose a wide range of formal restrictions on student behavior, and there are even
more restrictions that arise owing to students monitoring one another (Burdette, Ellison, Hill,
& Glenn, 2009). This is not to say that wrongdoing does not occur at religious universities,
but there are stringent rules about student behavior, and the most zealous students police oth-
ers so that a culture of moral behavior is often evident (Regnerus, 2003). A culture that priori-
tizes moral principles can become a hallmark of these schools, so much so that students
self-selecting into them are unlikely to do so unless they are intrinsically motivated to com-
ply with established norms.
In addition to reflecting an individual’s moral principles, attendance at one of these
schools may shape moral principles. Attending university, for either graduate or undergradu-
ate education, constitutes a vulnerable time in a person’s life where they assimilate a tremen-
dous amount of knowledge and learn principles about what is right and wrong (Kracher,
Chatterjee, & Lundquist, 2002). Research shows that universities where college students
choose to study powerfully affect those students’ espoused values (Finlay & Walther, 2003;
Lyon et al., 2002). Consistent with this idea, Martin et al. (2016) recently showed that key
aspects of managers’ upbringing influence their behavior and effectiveness as leaders. Thus,
CEO candidates who studied at religious universities could have had their ethical principles
shaped, in part, by their student experience.
The moral character of CEOs with degrees from religious universities could positively
affect the organization’s culture so that others would be less likely to engage in fraud. Given
that CEOs are at the helm of the firm and have ultimate decision-making responsibility, they
have the power to reduce the likelihood of misconduct at their organization. CEOs are in the
unique position of being able to implement policies and procedures that prevent fraud, and
CEOs with a degree from a religious institution could avail themselves of this opportunity
(Pfarrer, Smith, Bartol, Khanin, & Zhang, 2008). Consistent with this rationale, we suggest
the following:
Hypothesis 3: The likelihood of misconduct will be lower when firms appoint a CEO successor with
a degree from a religiously affiliated university than when they appoint a CEO successor without
such a degree.
The extent to which misconduct occurs in an industry is likely to change the nature of the
influence of CEOs with a degree from a religious institution. In industries where misconduct
is rare, we argue there will be little difference between CEOs with degrees from religious
universities and other CEOs. These industries already have strong norms behavior, and CEOs
that operate in them will be well attuned to those expectations (Zahra, Priem, & Rasheed,
2005). The firm can ill afford to violate those norms of operation. Maintaining legitimacy
will be of paramount concern for firms in these industries (Bundy, Pfarrer, Short, & Coombs,
2017), so ethical behavior will necessarily be the priority for any CEO that directors bring in
as a successor. If the firm is going to continue to do business in these industries, there is no
room for misbehavior. Therefore, we expect that in industries where misconduct is rare,
CEOs with degrees from religious universities will behave ethically, but so will other CEOs
because it is imperative that they do so.
In industries where misconduct is comparatively common, the differences between CEOs
with degrees from religious schools and other CEOs are more profound. In this case, estab-
lishing the firm’s ethical principles is only one component of the successor CEO’s charter
and not necessarily among the highest priorities. Establishing the firm’s legitimacy may not
be overly problematic given that the firm has not strayed far from industry norms even if they
engaged in misconduct (Zahra et al., 2005). CEOs in these industries could have pressures on
them for other outcomes, such as profitability, innovation, and growth, that outweigh pres-
sures for ethical behavior. These industries highlight the differences between CEOs with
degrees from religious universities, who are likely to maintain ethical behavior regardless of
external demands, and other CEOs, who might succumb to such pressures.
Thus, although directors of firms in high-misconduct industries are the ones least likely to
turn to CEOs with a degree from a religious university (i.e., Hypothesis 2), firms in industries
where misconduct is more common could actually benefit the most from the heightened
moral standards of these individuals (i.e., Hypothesis 4). Stated formally, the hypothesis is as
follows:
Hypothesis 4: The negative relationship between choosing a CEO successor with a degree from a
religiously affiliated university and the likelihood of misconduct is stronger in industries where
misconduct is common than it is in industries where misconduct is rare.
Study 1: S&P 1500 Firms

Sample and Measures
The sample for our study starts with the S&P 1500 firms covered by ExecuComp over the
years 2000 to 2013. We identified a total number of 2,709 CEO succession events for these
firms during this sample frame. We dropped 388 CEO succession events of firms in the
financial service industries because these firms follow different accounting reporting rules
and face stringent regulation. We used BoardEx to identify CEOs and board members’ alma
maters. Management Diagnostic Limited, which specializes in collecting and disseminating
social network data, maintains the BoardEx database. We used data from the Integrated
Postsecondary Education Data System (IPEDS) to identify religious affiliation (Hill, 2011;
Saunders, 2008). We were unable to clearly identify and classify the educational background
for 966 CEOs, leaving us with 1,355 CEO succession events. In addition, we removed 266
succession events from our sample due to unavailable control variables, leaving us with a
final sample of 1,089 succession events.
First dependent variable: Religious-university CEO. The dependent variable for Hypoth-
eses 1 and 2 is religious-university CEO, which is whether a CEO successor holds a degree
from a religiously affiliated university (Hill, 2011). This variable receives a value of 1 if a CEO
has a bachelor’s or master’s degree from a religiously affiliated university and 0 otherwise.
We use this measure as an observable indicator of personal religiousness, which reflect ethi-
cality. The rationale is that there is a well-documented tendency for individuals to associate
personal religiousness with high moral standards (Vitell, 2009). For instance, researchers have
shown that individuals rate people described as religious as being more moral, ethical, and
trustworthy than those who are not religious (Bailey & Young, 1986; Gervais, Shariff, &
Norenzayan, 2011). Importantly, scholars have observed these effects both when one’s religios-
ity is explicitly stated and when it is implied via an external indicator (Galen, Smith, Knapp, &
Wyngarden, 2011). Evidence suggests that individuals make inferences about religiosity sub-
consciously (Pichon, Boccato, & Saroglou, 2007). As a result, we suggest that religious school
affiliation is a useful proxy for adherence to an ethical code of conduct.
To capture these data, we turn to the National Center for Education Statistics, which col-
lects IPEDS data annually (Saunders, 2008). This covers every college, university, and voca-
tional institution that participates in federal student financial aid programs. In addition to
academic and admissions data, they also collect data on institutional characteristics, includ-
ing the school’s mission and religious affiliation. The database shows universities with his-
torical religious affiliations as not having active religious affiliations. Among 1,089 newly
hired CEOs in our final sample, 178 of them received a degree from a religiously affiliated
university. We checked which of these universities have obvious religious names (e.g.,
“Christian” or “Baptist” in the school name), because this could have signaling implications.
However, only 1.5% of CEOs in our sample had degrees from universities that stated their
religious affiliation in their school name.
Second dependent variable: Financial misconduct. The dependent variable for Hypoth-
eses 3 and 4 is financial misconduct, which occurs when managers take actions that deceive
investors or stakeholders. Financial fraud often involves corruption, lying about facts, failure
to disclose material information, falsifying information about the firm’s performance, or cov-
ering up systematic problems. This is an apropos operationalization for our study because it
reflects a breach of stakeholder trust, so scholars commonly use financial fraud as a measure
of corporate misconduct (Arthaud-Day et al., 2006; Connelly, Shi, & Zyung, 2017; Shi, Con-
nelly, & Sanders, 2016).
Despite the ubiquity of research examining financial fraud, there are multiple approaches
to measuring when it has occurred. We, therefore, develop a comprehensive operationaliza-
tion of financial misconduct by combining three well-established sources (including only
one instance for events that occur in more than one source). The first is the Securities and
Exchange Commission (SEC) Accounting and Auditing Enforcement Releases (AAERs).
The SEC acts against firms that have violated required financial reporting requirements (Shi,
Connelly, & Hoskisson, 2017). This component of our measure, therefore, mainly captures
firms that have admitted restating earnings or have unusually large write-offs. The second is
securities class action lawsuits, which captures instances where shareholders have been
defrauded (Shi et al., 2016). We require lawsuits to have been settled for at least $2 million,
which separates frivolous from meritorious lawsuits (Choi, 2007). This component of our
measure represents another way of viewing financial misconduct because, rather than “cook-
ing the books,” it uncovers other means by which executives may have cheated their share-
holders. The third is instances of accounting malpractice, as found in the Audit Analytics
database on Legal Case and Legal Parties. This is important because there are cases of
accounting malpractice that do not result in an AAER, and there are AAERs that Audit
Analytics does not list as malpractice. With this approach, there are 526 firm-year observa-
tions associated with commission of misconduct.
Independent variables. We have two independent variables in this study. The first, for
Hypotheses 1 and 2, is financial misconduct. We use the same sources to identify miscon-
duct. Here we are concerned with detection of misconduct because directors must know that
the misconduct occurred (they might not know about situations where the CEO is cheating
and getting away with it). For example, the SEC could announce in 2008 that misconduct
occurred during the years 2005 to 2008. In this case, we would code misconduct as 1 for the
years 2005 to 2008, but detection of misconduct is 1 only for 2008. Among 1,089 firm-year
observations where CEO turnover occurred, 80 of them had misconduct detected in the prior
year. The second independent variable, for Hypotheses 3 and 4, is religious-university CEO,
as previously described.
Moderating variable. To measure the prevalence of financial misconduct in an industry,

we counted the number of instances of misconduct (excluding the focal firm) in each industry
for each year, based on the Fama-French 48-industry classification. We divided by the num-
ber of firms in the industry to determine average industry misconduct, labeled as industry
misconduct intensity.
Control variables (Hypotheses 1 and 2). When modeling whether a newly appointed
CEO has a degree from a religiously affiliated university, we included a number of key
firm-level variables that capture potential matching between firms and religious university
CEOs. We first control for firm misconduct intensity. Firms that have frequently engaged
in misconduct in the past may not find misconduct an issue. This control variable is mea-
sured as the running average of misconduct committed by firms during our sample period.
We controlled for firm size using the natural logarithm of market value and firm perfor-
mance using return on equity (ROE), which is the ratio of operating income after deprecia-
tion to total shareholders’ equity. In addition, we controlled for debt ratio (the ratio of the
sum of long-term debt and debt in current liabilities to total assets) and cash-holding ratio
(the ratio of cash and short-term investments to total assets). We also controlled for firm
visibility (the ratio of advertising expenditure to total revenues) as more visible firms will
find it more urgent to signal their commitment to misconduct prevention through hiring
religious university CEOs.
We also included a number of CEO-level control variables. We controlled for MBA degree
because an MBA degree may offset the potential positive effect on the directors’ image about
CEO candidate’s image (Mintzberg, 1973). This control variable receives a value of 1 if a
CEO holds an MBA degree and 0 otherwise. We controlled for CEO age and CEO gender,
the latter of which receives a value of 1 for females and 0 for males. Last, we included CEO
origin as a control variable (outsider vs. insider) because this can be an important consider-
ation in the wake of misconduct. Consistent with prior research on CEO origin (Zhang &
Rajagopalan, 2010), a CEO was considered as an outside CEO if he or she had firm tenure of
less than 2 years when he or she assumed the CEO position. We also controlled for whether
a predecessor CEO holds a degree from a religious university (religious-university predeces-
sor) because predecessor characteristics can also affect CEO selection decisions (Kunisch
et al., 2019).
At the board level, we controlled for the ratio of outside directors who hold a degree from
a religiously affiliated university (religious-university outside director ratio) because boards
with a large number of outside directors with degrees from religiously universities may be
more likely to hire a CEO with a similar degree. For the same reason, we controlled for the
ratio of non-CEO top managers who hold a degree from a religiously affiliated university
(religious-university TMT ratio). Last, we controlled for industry, using the Fama-French
48-industry classifications, and year fixed effects.
Control variables (Hypotheses 3 and 4). When modeling the likelihood of financial mis-
conduct as our dependent variable, we used a slightly different set of control variables. At
the firm level, we controlled for firm size using the natural logarithm of total market value
and firm performance using ROE. Higher debt ratio may increase the probability of financial
misconduct by providing incentives for firms to inflate reported earnings and other account-
ing measures to avoid violating debt covenants (Khanna, Kim, & Lu, 2015). Higher cash-
holding ratio may weaken firms’ incentives to inflate their earnings because such firms are
less financially constrained. Highly visible firms may face strong scrutiny from external
stakeholders, which may prevent firms from engaging in misconduct, so we also controlled
for firm visibility.
At the CEO level, we controlled for CEO ownership and CEO optional-pay ratio because
a battery of studies show that equity incentives can affect financial misconduct (Efendi,
Srivastava, & Swanson, 2007; Harris & Bromiley, 2007). CEO ownership is the percentage
of ownership by the CEO to total shares outstanding, and CEO option-pay ratio is the ratio
of total CEO option compensation value to total CEO compensation. We controlled for CEO
duality (1 if the CEO is board chair) because CEOs who are board chair are less concerned
about board monitoring, which could influence the likelihood of financial misconduct.
In addition, when misconduct is our dependent variable, we controlled for a number of
factors that can influence the firm’s governance quality. The first is institutional ownership
concentration because monitoring by institutional investors may reduce the likelihood of
financial misconduct (Hadani, 2012). Institutional ownership concentration is a Herfindahl
index of ownership percentages of institutional investors. As important information interme-
diaries, financial analysts play a significant role in monitoring top executives (Chen, Harford,
& Lin, 2015), which could also reduce the likelihood of financial misconduct. We, therefore,
controlled for the number of financial analysts covering a firm (analyst coverage). We
included board independence as a predictor of financial misconduct because it is related to
monitoring by board members, which is measured as the ratio of outside directors to board
size. We controlled for religious-university outside director ratio and religious-university
TMT ratio because having outsiders and top managers with degrees from religious universi-
ties could confound the influence of having a CEO from a religiously affiliated university.
Last, we controlled for year fixed effects.
Estimation
To test our first two hypotheses, we used a cross-sectional data set that includes only
observations associated with CEO successions. Given that the dependent variable is binary,
we used probit regressions to test these two hypotheses, controlling for industry fixed effects.
We did not control for firm fixed effects given the cross-sectional nature of the data set for
these hypotheses.
Given that we use a sample of CEO succession firm years to test Hypotheses 1 and 2,
this could lead to potential sample selection bias. Specifically, there can be unobservable
firm characteristics that drive whether a firm experiences a succession event and the type
of CEOs hired. To alleviate this concern, we conduct Heckman selection models. In the
first-stage probit regression, we estimate the likelihood of a firm having a succession
event. The predictors in the first-stage regression include firm size, firm performance, debt
ratio, cash-holding ratio, firm visibility, year fixed effects, and industry fixed effects. In
addition, we include a potentially exogenous variable that can predict whether a firm has a
CEO succession event but may not predict what types of CEOs will be hired. Specifically,
we calculate an industry CEO succession ratio, measured as the ratio of the number of
CEO succession events in an industry year to the total number of firms in an industry.
When CEO succession is frequent in an industry, this can increase the demand for CEO
candidates and reduce the likelihood of a focal firm having a CEO succession event.
However, the industry CEO succession ratio should not have a direct influence on the type
of CEOs being hired. Consistent with our argument, we find that the coefficient estimate
of industry CEO succession ratio is negative (b = −0.81, p = .024) in the first-stage regres-
sion. From the first-stage regression, we then calculate an inverse Mills ratio and control
for it in the second stage.
To test Hypotheses 3 and 4, we do not constrain our sample to firm years associated
with CEO successions. Given that the data set used to test Hypotheses 3 and 4 is struc-
tured as a panel, we conducted firm fixed-effects ordinary least squares (OLS) regressions
to test these hypotheses. Firm fixed effects are also well suited to testing our hypotheses
because they control for unobservable time-invariant firm heterogeneity that could shape
firm financial misconduct. Firm fixed-effects regressions allow us to examine within-firm
change, or the extent to which change in our independent variable relates to our dependent
variable, which is consistent with our theory. More important, we can observe only mis-
conduct that is detected, and the probability of detection should be relatively stable for
any given firm that engages in misconduct. In this sense, within-firm estimation can help
alleviate concern that heterogeneity in misconduct detection across firms biases our
results. We measure financial misconduct at time t + 1 and the independent and control
variables at time t.
Results
In Table 1, we present descriptive statistics and pairwise correlations for all variables. In
Table 2, we present the probit regressions used to test our first two hypotheses. In Model 1,
we include all the control variables. We find that several controls are significant, including
religious-university predecessor, which is positive (β = 0.86, p < .01). In addition, the coef-
ficient estimate of the inverse Mills ratio is positive (β = 5.06, p = .004). In Model 2, the
coefficient estimate of financial misconduct is 0.54 (p = .005), consistent with Hypothesis 1.
The marginal effect of financial misconduct on our dependent variable is 0.11 (p = .005),
supporting Hypothesis 1. At firms that are choosing a new CEO, the likelihood of choosing
a successor with a degree from a religious university is 13 percentage points higher for those
that announced financial misconduct than for those that did not announce financial
misconduct.
Table 1
Descriptive Statistics and Correlations
Variable M SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1. Financial misconduct 0.05 0.22 —

2. Religious university 0.15 0.36 −.02 —
3. Industry misconduct 0.05 0.05 .07 −.01 —
intensity
4. Firm size 7.55 1.55 .13 .00 −.01 —
5. Firm performance 0.22 0.33 −.01 .02 −.06 .26 —
6. Debt ratio 0.22 0.18 .02 .06 −.07 .11 .15 —
7. Cash-holding ratio 0.15 0.17 .03 −.06 .16 −.16 −.16 −.41 —
8. Firm visibility 0.01 0.03 .02 .02 .00 .06 .06 −.03 .09 —
9. MBA degree 0.40 0.49 .00 −.03 .01 .00 .00 −.01 −.04 .03 —
10. CEO age 41.49 3.58 −.13 −.01 −.15 −.02 .01 −.06 .05 .02 −.01 —
11. CEO origin 0.32 0.47 .00 −.04 .05 −.15 −.09 −.02 .09 .03 .02 .03 —
12. CEO equity ownership 0.01 0.03 −.05 −.03 −.02 −.17 −.05 −.09 .10 .04 −.07 .25 .01 —
13. CEO option pay ratio 0.26 0.27 .10 −.03 .15 .14 −.03 −.06 .14 .02 .04 −.34 .02 −.14 —
14. CEO duality 0.60 0.49 .04 .02 −.03 .15 .05 .09 −.10 −.04 −.03 −.18 −.15 .10 .05 —
15. Institutional ownership 0.05 0.05 −.04 .01 −.01 −.27 −.11 −.01 .06 .00 .00 .03 .08 .14 −.07 −.05 —
concentration
16. Analyst coverage 9.51 7.97 .12 .00 .03 .62 .10 −.04 .06 .05 −.03 .08 −.11 −.07 .15 .06 −.05 —
17. Board independence 0.67 0.13 −.06 .01 −.11 −.18 −.03 .03 −.04 .01 .03 .42 .09 .10 −.17 −.11 .09 −.14 —
18. Religious-university 0.20 0.46 −.03 .69 .00 −.01 .02 .05 −.04 −.02 .04 .04 −.03 −.03 −.04 .03 .00 −.01 .00 —
predecessor
19. Religious-university 0.12 0.17 −.01 .00 .03 .02 −.01 −.01 .01 −.03 .03 .02 .03 −.02 .02 .04 .05 .09 .05 .02 —
TMT ratio
20. Religious-university 0.18 0.15 −.01 .10 −.01 .03 .02 .05 −.03 −.03 .01 .06 .00 −.01 −.03 .00 .02 .01 .03 .10 .05 —
outside director ratio
Note: N = 10,207. TMT = top management team.
13
Table 2
Probit Regression of New CEO Selection
Variable Model 1 Model 2 Model 3 Model 4
Financial misconduct 0.54 0.55 0.90

[.005] [.005] [.001]
Industry misconduct intensity −0.47 0.55
[.668] [.652]
Financial Misconduct × Industry Misconduct Intensity −5.15
[.042]
Firm misconduct intensity −0.34 −0.62 −0.63 −0.60
[.489] [.219] [.210] [.236]
Firm size −0.10 −0.12 −0.12 −0.12
[.009] [.003] [.003] [.003]
Firm performance −0.35 −0.35 −0.35 −0.33
[.094] [.095] [.099] [.122]
Debt ratio 1.05 1.05 1.05 1.05
[.001] [.001] [.001] [.001]
Cash-holding ratio −0.66 −0.75 −0.73 −0.73
[.119] [.085] [.092] [.094]
Firm visibility 2.34 2.27 2.23 2.11
[.317] [.326] [.334] [.364]
MBA degree −0.25 −0.27 −0.27 −0.27
[.015] [.010] [.010] [.010]
CEO age −0.11 −0.11 −0.11 −0.11
[.007] [.007] [.007] [.008]
CEO origin 0.04 0.03 0.03 0.02
[.680] [.781] [.785] [.831]
Religious-university predecessor 0.86 0.88 0.88 0.88
[.000] [.000] [.000] [.000]
Religious-university outside director ratio 0.32 0.35 0.35 0.34
[.329] [.293] [.296] [.318]
Religious-university TMT ratio −0.15 −0.15 −0.15 −0.16
[.681] [.686] [.682] [.662]
Inverse Mills ratio 5.06 5.07 5.04 5.02
[.004] [.004] [.004] [.004]
Constant −3.67 −3.58 −3.53 −3.50
[.022] [.026] [.028] [.030]
Observations 1,089 1,089 1,089 1,089
Industry FE Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
χ2 142.9 148.6 152.6 152.5
Log-likelihood −404.2 −400.2 −400.1 −398.5
Note: Coefficients shown with p values reported in brackets (two-tailed tests). TMT = top management team;
FE = fixed effects.
In Model 3, we test the direct effect of our moderator, which is not significant (β = −0.47,
p = .668). In Model 4, we examine its moderating effect and find that the coefficient estimate
of Financial Misconduct × Industry Misconduct Intensity is negative (β = −5.15, p = .042).
The coefficients of interaction terms in nonlinear models do not always represent the true
Figure 1
Moderating Effect of Industry Misconduct (Archival Study)
interactions (Hoetker, 2007; Wiersema & Bowen, 2009). Thus, we follow Wiersema and
Bowen (2009) to consider the moderating influence by examining the marginal effect of the
interacted variables. The marginal effect of financial misconduct on the likelihood of appoint-
ing a CEO successor with a degree from a religious university is stronger when industry mis-
conduct intensity takes its mean minus one standard deviation (b = 0.18, p = .001) than when
industry misconduct intensity takes its mean plus one standard deviation (b = 0.08, p = .050),
supporting Hypothesis 2.
We also calculate and graph the magnitude of the moderating effect. When industry mis-
conduct is rare (mean minus one standard deviation), the likelihood of choosing a successor
with a degree from a religious university is 24 percentage points higher for observations with
financial misconduct than those without financial misconduct. However, when industry mis-
conduct is common (mean plus one standard deviation), the same likelihood is 9 percentage
points higher for observations with financial misconduct than those without misconduct. We
graph this interaction in Figure 1. The positive relationship between misconduct and the
likelihood of appointing a CEO with a degree from a religious university is stronger for firms
in industries with low incidences of misconduct (solid line). The relationship is less pro-
nounced for firms in industries where misconduct is common (dotted line).
The models in Table 3 test Hypotheses 3 and 4. Models 1 through 3 present results from
firm fixed-effects OLS regressions. In Model 1, the coefficient estimate of religious-univer-
sity CEO is negative (β = −0.04, p = .005), consistent with Hypothesis 3. The likelihood of
misconduct reduces by 4 percentage points after a religious university CEO succeeds a non-
religious-university CEO.
We evaluate Hypothesis 4 by splitting the sample at the industry median and report the
results in Table 3. The reason for conducting a split sample analyses is that industry miscon-
duct intensity does not change much over time, so we cannot include it as a variable in our
firm fixed-effects regression models (in unreported results, we find that the coefficient esti-
mate of Religious-University CEO × Industry Misconduct Intensity is statistically not
Table 3
Religious-University CEO and Financial Misconduct
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
Variable OLS OLS OLS Logit Logit Logit OLS
Religious-university CEO −0.04 −0.07 −0.01 −0.67 −1.01 −0.47

[.005] [.001] [.572] [.032] [.024] [.380]
Post-Turnover Period × −0.04
Religious-University CEO [.085]
Post-turnover period −0.01
[.659]
Firm size 0.04 0.04 0.04 0.78 0.65 1.16 0.04
[.000] [.000] [.000] [.000] [.000] [.000] [.003]
Firm performance −0.01 −0.00 −0.02 −0.10 −0.12 −0.47 −0.00
[.231] [.800] [.138] [.643] [.711] [.273] [.828]
Debt ratio 0.10 0.14 0.05 2.76 2.65 3.26 0.08
[.000] [.001] [.198] [.000] [.003] [.042] [.176]
Cash-holding ratio −0.01 −0.01 −0.06 0.89 0.84 0.56 0.04
[.612] [.763] [.192] [.267] [.386] [.771] [.628]
Firm visibility −0.38 −0.59 0.26 −7.91 −13.10 19.01 −1.06
[.196] [.154] [.594] [.163] [.071] [.322] [.057]
CEO equity ownership −0.11 −0.18 0.03 −4.24 −2.69 0.13 −0.35
[.364] [.386] [.869] [.176] [.482] [.982] [.052]
CEO option-pay ratio 0.02 0.02 0.01 0.28 0.34 0.22 0.04
[.086] [.233] [.761] [.278] [.323] [.681] [.195]
CEO duality 0.03 0.02 0.04 0.46 0.24 1.05 −0.00
[.000] [.121] [.000] [.021] [.360] [.010] [.993]
Institutional ownership 0.01 −0.02 0.04 0.79 −1.11 5.85 0.01
concentration [.803] [.790] [.605] [.762] [.815] [.481] [.948]
Analyst coverage 0.00 0.00 0.00 0.03 0.02 0.05 0.00
[.411] [.912] [.411] [.044] [.343] [.142] [.010]
Board independence 0.05 0.02 0.01 −0.13 0.62 −1.69 −0.04
[.090] [.663] [.755] [.885] [.655] [.244] [.611]
Religious-university TMT ratio −0.02 0.02 −0.02 −0.36 0.75 −0.73 −0.06
[.466] [.654] [.612] [.547] [.376] [.518] [.155]
Religious-university outside −0.05 −0.00 −0.06 −1.67 −0.34 −2.74 0.04
director ratio [.100] [.965] [.179] [.035] [.755] [.095] [.611]
Constant −0.26 −0.21 −0.24 −0.12
[.000] [.013] [.000] [.298]
Observations 10,207 5,067 5,140 2,269 1,090 666 2,989
Firm FE Yes Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes Yes
χ2 230.6 118 94.34
Log-likelihood −669.3 −333.3 −183
Adjusted R2 .226 .234 .204 .263
Note: Coefficients shown with p values reported in brackets (two-tailed tests). OLS = ordinary least squares;
TMT = top management team; FE = fixed effects.
significant using the whole sample). In Model 2 of Table 3, we see that for firms operating in
industries where misconduct is common, the relationship described by Hypothesis 3 holds.
That is, choosing a CEO successor with a degree from a religious institution is a negative
predictor of misconduct (β = −0.07, p = .001). Model 3 shows that for firms operating in
industries where misconduct is rare, the relationship described by Hypothesis 3 no longer
holds (β = −0.01, p = .572). These results lend support to Hypothesis 4. Models 4 through
6 present results from firm fixed-effects logistic regressions, which by nature of the analysis
include only firms that have a time-variant dependent variable. With this analysis, we con-
tinue to find support for Hypotheses 3 and 4.
Supplementary Analyses
Endogeneity. To mitigate endogeneity concerns, we conduct a difference-in-differences
analysis, comparing financial misconduct before and after transitions from having a CEO
with a religiously affiliated degree to one without such a degree, using a control sample
of firms that transition from a CEO without a religiously affiliated degree to another CEO
without such a degree.
There are two advantages associated with difference-in-differences. First, it requires a
CEO to be in power for a durable period, alleviating any unique effects of CEO turnover. We
require that a CEO be in power for at least 3 years so that he or she can have sufficient time
to influence firm decisions. Second, we use transitions from CEOs without a religiously
affiliated degree to another CEO without a religiously affiliated degree as a control group,
which conditions our test on the occurrence of CEO turnover of any kind. Specifically, we
conduct the following regression:
Yi ,t +1 = αt + δi + β1 × Post i ,t +1 + β2 × Post i ,t +1 × Religiousi + γ × X i ,t + εi ,t (1)
where i indexes firm and t indexes time; Yi,t+1 is the dependent variable of interest (financial
misconduct); αt and δi are year and firm fixed effects, respectively; Xi,t is a vector of control
variables to rule out potential confounding effects; εit is an error term; Religiousi is an indica-
tor variable for whether firm i has a transition from a CEO without a religiously affiliated
degree to one with a religiously affiliated degree; and Posti,t+1 is an indicator variable for
whether year t + 1 is after the CEO transition. Because the specification includes firm fixed
effects, it is not necessary to include a religious dummy variable (Huang & Kisgen, 2013).
We conducted firm fixed-effects OLS regressions with financial misconduct as the depen-
dent variable.
We present the results from these analyses in Model 4 of Table 3. The coefficient estimate
of Post-Turnover Period × Religious-University CEO is negative (β = −0.04, p = .085),
indicating that CEOs with a degree from a religiously affiliated university reduce the likeli-
hood of financial misconduct more than other CEOs. We can interpret the coefficient esti-
mate of the interaction term as an approximate indicator of the percentage decrease in the
likelihood of misconduct. During the 3 years after transition to a CEO with a degree a reli-
giously affiliated university, the likelihood a firm engages in misconduct is 4 percentage
points lower than for a firm that transitions to having another CEO without a religious degree.
Bivariate probit regressions with partial observability. Studies that investigate fraudu-
lent behavior of any kind have to deal with a common problem: One observes only miscon-
duct that is actually detected. There is no expedient mechanism for observing misconduct
that is committed but not detected. We account for this potential concern by reanalyzing our
data using bivariate probit analysis with partial observability (Wang, 2013; Wang, Winton,
& Yu, 2010). To do so, we model managerial misconduct as the combined result of two
latent variables: misconduct commitment, P(M), and misconduct detection given commit-
ment, P(D|M). These models are useful from a theoretical perspective (Wang, 2013), but
they are empirically challenging because they suffer from a loss of efficiency and estimation
failures are commonplace (Poirier, 1980). They can be useful as a supplementary analysis of
the likelihood of misconduct because they attempt to parse out the likelihood of committing
misconduct, as opposed to detecting. To be clear, though, these models are only predictive;
we do not actually know which firms are committing misconduct without being detected. We
use bivariate probit regressions with partial observability only as a robustness check.
There are two main requirements to achieve full identification for these models (Poirier,
1980). First, variables used to test detection of misconduct and commitment of miscon-
duct must not include the same variables. Second, the predictors should have significant
variation. Based on these requirements, the model is better identified if variables in com-
mitment of misconduct and detection of misconduct use continuous, as opposed to binary
or dummy, variables (Wang, 2013). Therefore, we leave out the firm fixed effects and year
fixed effects for these models because including them leads to an inability to estimate
parameters.
In Models 1 and 2 of Table 4, we use different control variables for P(M) and P(D|M). To
model P(M), we control for firm size, firm performance (ROE), debt ratio, cash-holding
ratio, CEO equity ownership, CEO option ratio, CEO duality, religious-university TMT ratio,
and religious-university outside director ratio. To model P(D|M), we control for a subset of
those variables that are most likely to predict detection. The first is stock returns, because
underperforming firms would be one of the more obvious red flags for misconduct. We also
control for stock return volatility, as it reflects a firm’s level of risks, which can motivate
misconduct detection. In addition, we control for firm visibility, as more visible firms receive
more attention from stakeholders. We control for industry misconduct intensity, because
firms from industries with more intensive misconduct activities are more likely to become
targets of misconduct detection. We also control for a number of governance variables (insti-
tutional ownership concentration, analyst coverage, board independence, and CEO duality)
that may influence misconduct detection.
Model 1 shows the results from bivariate probit regressions of P(M), and Model 2 shows
P(D|M). The coefficient for religious university CEO is positive (β = −0.13, p = .074) in
Model 1, consistent with Hypothesis 3.
Prestigious universities. To gain a deeper insight into the role of religious-university

degrees in CEO succession, we classify religious universities into two types based on their
prestige. We use the school’s acceptance rate as a measure of university prestige (Wiersema
& Bird, 1993). Using the median acceptance rate of all universities covered in our sample, we
classify religious universities with an acceptance rate below the median as more prestigious
and those with an acceptance rate above the median as less prestigious. In unreported (but
available) results, we find support for Hypotheses 1 and 2 if we use religious universities
with low prestige as the dependent variable but not if we use religious universities with high
prestige as the dependent variable. One possibility for this finding could be that directors
assume all candidates with a degree from a prestigious school have strong ethics, so religious
Table 4
Bivariate Probit Regressions With Partial Observability
Model 1 Model 2
Variable P(M) P(D|M)
Religious-university CEO −0.13

[.074]
Firm size 0.09 0.06
[.026] [.084]
Firm performance −0.09
[.235]
Debt ratio 0.50
[.012]
Cash-holding ratio 0.43
[.026]
CEO equity ownership −2.24
[.019]
CEO optional-pay ratio 0.30
[.002]
CEO duality −2.44 1.58
[.000] [.000]
Religious-university TMT ratio −0.24
[.111]
Religious-university outside director ratio 0.08
[.568]
Stock returns −0.11
[.003]
Stock return volatility 3.30
[.000]
Firm visibility 0.72
[.335]
Industry misconduct intensity 2.15
[.000]
Institutional ownership concentration −1.46
[.040]
Analyst coverage 0.01
[.015]
Board independence −0.21
[.214]
Constant 1.38 −2.48
[.065] [.000]
Observations 9,976
χ2 108.2
Log-likelihood −1802
Note: Coefficients shown with p values reported in brackets (two-tailed tests). P(M) = misconduct commitment;
P(D|M) = misconduct detection given commitment; TMT = top management team.
affiliation does not add information about the candidate’s ethics. Alternatively, directors
might ignore religious affiliation for candidates from prestigious institutions because they
want their human capital, regardless of the candidate’s ethics.
Variation in religiousness. To consider potential differences in the degree of religious-

ness, we measure whether a religious group originally founded a university, finding that reli-
gious groups founded about 40% of the universities in our sample (e.g., Dartmouth, which
was originally Puritan Congregationalist but is now nonsectarian). We conducted analyses
by examining CEOs with a degree from a university that a religious group founded. In unre-
ported results, we found only marginal support for Hypothesis 1 and no support for our other
hypotheses. This illustrates that the current religious affiliation of a CEO’s degree-granting
institution is a pertinent measure, as opposed to the affiliation of the degree-granting institu-
tion at founding, which is not pertinent.
Schools might signal religious affiliation in the title of their school. Some may not recog-
nize that Santa Clara University is a Roman Catholic school (in the Jesuit tradition), but there
is no mistaking the affiliation of Ouachita Baptist University. To address the influence of
signaling via the school name, we coded our data for obvious indicators of religious affilia-
tion, such as Christian, Baptist, Catholic, and a wide range of other obvious denominations
and religions. What we found, though, was that only a very small percentage of CEOs in our
sample had degrees from universities that stated their religious affiliation in their title.
Relatedly, there could be a range of schools, such as Notre Dame and Brigham Young
University, that do not explicitly state their religious affiliation in the school name, but many
people know they are religious. The difficulty here is there is not agreement among who
recognizes the religious affiliation of many schools, such as Santa Clara or the University of
Dayton, both of which are Roman Catholic. Thus, there is an assumption in our work that for
the schools within the subset of CEO candidates, directors will know at least for that limited
number of schools whether they have a religious affiliation.
Alternative operationalization. We tested our results using Wiersema and Zhang’s (2011)
classification of CEO dismissals, but there are much fewer of these (231 firm-year observa-
tions). The results did not hold, we expect owing to the considerably reduced sample size.
Nonetheless, we contend that it is more appropriate to our analysis to include all instances
of CEO turnover in the wake of misconduct because doing so is consistent with our image
theory rationale.
Alternative explanation. An alternative reason the board of directors could hire a CEO
with a degree from a religiously affiliated university could be to trigger positive shareholder
reactions (Gomulya & Boeker, 2014). However, this alternative explanation assumes that
stock markets would react positively to the announcement of a successor with a religiously
affiliated degree (Bergh, Connelly, Ketchen, & Shannon, 2014). To consider this alternative
explanation, we examine stock market reaction to CEO appointment announcements in the
aftermath of misconduct.
To conduct such an analysis, we collected the specific dates of all CEO appointment
announcements. We were able to identify exact dates for 234 of the CEO appointments in our
sample. This allowed us to examine whether the interaction between discovery of financial
misconduct and subsequent announcement of CEO turnover with a successor that has a
degree from a religiously affiliated institution is positively associated with cumulative abnor-
mal returns (using a window of 3 days [−1, +1]). In unreported results, the coefficient esti-
mate of this interaction term is statistically not significant (β = −0.05, ns). Thus, the empirical
evidence does not favor a market-signaling explanation for choosing a CEO successor with
a degree from a religiously affiliated university because there is no positive feedback for the
signal (Bergh et al., 2014).
Study 2: Corporate Directors

We conducted a second study as an experimental complement to consider our ideas in a
different way. Our dependent variable for this second study is about not whom respondents
would choose as a successor in a given scenario but rather how important is their image of
the firm to their decision making about a successor. We used a policy-capturing approach
for our second study because it has advantages and limitations that are essentially orthogo-
nal to our prior analysis of archival data (Hitt, Ahlstrom, Dacin, Levitas, & Svobodina,
2004). For organizational misconduct, archival data cannot reveal the extent to which direc-
tors might be influenced, for example, by the media or people around them. Policy captur-
ing helps obviate this problem by manipulating only the predictor variables and not
providing respondents with cues about what others are saying or thinking. A limitation of
policy capturing, though, is that it relies on a small sample and does not assess actual behav-
ior in the marketplace.
Sample and Measures

The sample for our second study uses actual directors. We recruited former students from
a highly ranked executive MBA program (EMBA). We sent invitations to EMBA recent
alumni, requesting participation from those who have experience on a public or private (but
not nonprofit) board of directors. Our sample included 32 respondents, seven of which are
female and five of which are ethnic minorities. All respondents confirmed their board experi-
ence, and the average experience as a director was 8 years.
Dependent variable. We asked respondents to imagine they were on the board of direc-
tors of a publicly traded company and that it was time for them to select a new CEO. The
dependent variable was the importance of future misconduct prevention as a criterion for
CEO successor selection. We asked participants to rank in order of importance nine decision-
making criteria as they pertained to the CEO successor selection decision for each scenario.
We coded responses as an ordinal variable based on participants’ reported importance rank-
ing of the “likelihood the new CEO might misstate earnings in the future,” with 1 being least
important and 9 being most important.
We identified the nine decision-making criteria by performing a review of the succession
literature. Our review uncovered seven main criteria for succession decisions under normal
conditions (i.e., misconduct has not occurred) and two additional criteria that are especially
pertinent following misconduct. During a normal succession, we found that potential stock
market (Graffin, Boivie, & Carpenter, 2013; Zhang & Wiersema, 2009) and media/analyst
(Gomulya & Boeker, 2014; Wiersema & Zhang, 2011) reactions to the announcement of a
successor are important. There is also evidence that boards choose successors that can help the
company grow and perform well (Georgakakis & Ruigrok, 2017; Shen & Cannella, 2002). We
separated growth and performance because investing in growth can have different connota-
tions than focusing on performance (Cowling, 2006; S. Lee, 2014). We also separated short-
term from long-term firm performance, because some boards could be myopic about their
selection whereas others are more strategic (Ballinger & Marcel, 2010). In addition, there is
evidence that boards sometimes choose industry insiders to help maintain or develop supply
chain and partnership relationships. Employee reactions may also be important because stake-
holder primacy theory suggests that boards should be cognizant of employee needs (Ballinger,
Lehman, & Schoorman, 2010). Two additional criteria address decision making in the wake
of misconduct. One pertains to signaling to external stakeholders that future misconduct will
not happen. The last one tests future misconduct prevention to assess the relevance of image
theory.
Our resulting nine criteria are “likelihood the stock market might react positively/nega-
tively to your selection”; “likelihood the media or financial analysts might react positively/
negatively to your selection”; “likelihood the new CEO might produce/fail to produce the
expected market growth”; “likelihood the new CEO might deliver/not deliver positive short-
term financial performance”; “likelihood the new CEO might deliver/not deliver positive
long-term financial performance”; “likelihood the new CEO might develop/fail to develop
relationships with customers, suppliers, and other stakeholders”; “likelihood current employ-
ees might react positively/negatively to your selection”; “likelihood the new CEO might/
might not signal to external stakeholders that future misconduct will not occur”; and “likeli-
hood the new CEO might/might not misstate earnings in the future.”
Independent variable. The independent variable for our second study is financial mis-
conduct. For scenarios in which the company had discovered financial misconduct, coded
as 1, we included the following statement: “Your company was forced to issue an earnings
restatement during the prior year.” We also provided a definition of “earnings restatement,”
noting that it “occurs when a company has to reissue financial statements, such as their
annual earnings report. This often occurs due to fraudulent misuse of accounting procedures,
lack of oversight, or misinterpretation of accounting rules.” Other scenarios, coded as 0, did
not include this statement.
Moderating variable. The moderating variable was industry misconduct intensity. For
scenarios in which the company operated in an industry with high levels of misconduct,
coded as 1, we included the following statement: “In this scenario, imagine that issuing an
earnings restatement is something that is common in your industry. Companies in your indus-
try have to do it all the time.” Other scenarios, coded as 0, did not include this statement.
Control variables. We also included a number of control variables that might influence
respondents’ selection decisions in a succession context. Some studies show that female
executives may be less likely to engage in misconduct (Cumming, Leung, & Rui, 2015), so
we controlled for female respondent as a binary variable, with 1 being female. Directors with
considerable experience may be cognizant of key factors in successor selection (Beasley,
1996), so we controlled for director experience using a continuous variable for the number
of years. A respondent’s personal religiousness might also affect the extent to which they
focus on choosing a CEO that will reduce the likelihood of misconduct (Neubert et al., 2017).
We asked, “How important are your religious beliefs to you?” with responses on a 5-point
Likert scale ranging from extremely important to not at all important. Education level may
influence strategic decisions (Knippen, Shen, & Zhu, 2019), so we controlled for the level
of director education, which was coded as 3 for doctorate degrees, 2 for master’s degrees, 1
for bachelor’s degrees, and 0 otherwise. Some directors may be more comfortable with risk
than others, which could affect the importance of the likelihood a CEO would engage in
financial misconduct. We therefore controlled for personal risk propensity using a composite
measure of seven items developed by Lion and Meertens (2001). Following these authors,
we combined these items into a single 7-point variable ranging from 7 for a risk seeker to 1
for a risk avoider. Last, we controlled for directors’ religious education background using a
binary variable, which was coded as 1 if the director attended a religious college or university
for any degree and 0 otherwise.
Estimation and Results

We analyzed the data using hierarchical linear modeling (HLM) to account for both
within-person and between-person variance. We used the xtmixed command in Stata 15.0.
This command fits linear mixed models and contains both fixed and random effects. Its
model is
Yij = β0 X ij + β1 X ij + µ j + εij
for i = 1, . . . , 4 scenarios and j = 1, . . . , 32 respondents. Y represents respondents’ ratings

of the questions after each scenario (i.e., decision-making criteria). X represents treatment of
the events and other control variables for each respondent. The fixed portion of the model, β0
+ β1Xij, captures the population average. The random effect is captured by µj according to
each respondent, and random effects occur at the respondent level.
In Model 1 of Table 5, we show the direct effect of financial misconduct on the impor-
tance of misconduct prevention to directors’ decision making about a successor. Consistent
with the arguments of Hypothesis 1, we see a significant positive relationship (β = 1.22, p <
.001) for scenarios where the firm has engaged in prior misconduct.
In Model 2, the direct effect of industry misconduct is negative and not significant (β =
−0.53, p = .307). The interaction term is negative and significant (β = −1.62, p = .027),
consistent with the arguments of Hypothesis 2. We graphed the interaction effect in Figure 2,
which shows the positive relationship between prior financial misconduct and the impor-
tance of preventing misconduct is strong when a firm operates in an industry where miscon-
duct is rare (solid line). The relationship is less strong in industries where misconduct is
comparatively common (dotted line).
Supplementary Analyses
Ethicality of successors. It was not possible to test Hypotheses 3 and 4 using policy cap-
turing because the dependent variable is misconduct. However, we included two additional
scenarios at the end of our study where we presented participants with two CEO succes-
sor candidates, alike in all details except their university degree, and asked them to choose
the one that they believed would be most ethical. We then conducted an additional HLM
regression, this time using a degree from a religious university as the predictor and expected
ethicality as the dependent variable. This is akin to testing Hypothesis 3, but we cannot
Table 5
Hierarchical Linear Modeling Regression of Prevention of Misconduct as Decision-
Making Criterion
Variable Model 1 Model 2
Financial misconduct 1.22 2.03

[.001] [.000]
Industry misconduct intensity −1.34 −0.53
[.000] [.307]
Financial Misconduct × Industry Misconduct Intensity −1.62
[.027]
Female respondent 0.74 0.73
[.31] [.314]
Director experience 0.01 0.01
[.841] [.841]
Religiousness 0.03 0.02
[.934] [.934]
Education −0.95 −0.94
[.132] [.132]
Risk propensity 0.35 0.35
[.317] [.317]
Religious education background 2.925 2.92
[.084] [.084]
Constant 4.81 4.41
[.012] [.022]
Observations 128 128
χ2 36.54 42.59
Log-likelihood −289.73 −287.35
Note: Coefficients shown with p values reported in brackets (two-tailed tests).
Figure 2
Moderating Effect of Industry Misconduct (Policy Capturing)
measure whether the CEO candidates engage in misconduct, just whether participants think
they might. The results (unreported) were marginally significant (β = 0.31, p < .10). Since
there were only two scenarios for our 32 participants with this analysis, the sample size is
only 64, so our marginally significant result shows some support for the influence of having
a religious degree on perceived ethicality.
Signal to stakeholders. We also sought to consider the extent to which directors wanted
to use the CEO successor choice to signal to external stakeholders that they are serious about
preventing misconduct. To do so, we recoded the dependent variable to test for the ranked
importance of signaling to external stakeholders (i.e., “likelihood the new CEO might/might
not signal to external stakeholders that future misconduct will not occur”). We conducted the
same analyses with the same control variables as our main analysis, finding substantively
similar results. Our approach here is not a direct test of signaling theory, because we do not
distinguish between high- and low-quality signalers (Connelly, Certo, Ireland, & Reutzel,
2011). However, these additional results may indicate that directors choose a new CEO not
only with prevention of misconduct in mind but also with a view toward communicating their
sincerity to outside entities.
Discussion
We develop theory explaining why directors choosing a CEO successor following firm
misconduct consider the religious affiliation of the candidate’s university. Results confirm
our theory: Directors of firms that recently announced misconduct are more likely to choose
a CEO successor with a degree from a religiously affiliated institution than are directors of
firms where there was no misconduct. This effect is especially strong for directors of firms
operating in industries where misconduct is rare. A policy-capturing survey of actual direc-
tors reinforces our image theory logic. In addition, we tested the extent to which the strategy
of hiring a CEO with a degree from a religious school actually works. That is, are CEOs with
degrees from religiously affiliated institutions less likely to engage in misconduct than other
CEOs? We found they are. Again here, the effect holds only for CEOs operating in industries
where misconduct is common, because these industries allow CEOs with degrees from reli-
gious universities to stand out from their counterparts without such degrees.
Implications for Research and Practice

Our study adds to the literature on board decision making by incorporating an image
theory perspective into a literature that has been historically dominated by normative deci-
sion theory and expected utility. Doing so shifts the emphasis of their decision from the reac-
tion of external evaluators (Gangloff et al., 2016) to the mind of directors who have recently
undergone a traumatic change in their perception of the firm and its outlook (Marcel &
Cowen, 2014). Stated differently, we move the discussion of CEO successor selection from
the information economics of the decision to the way directors view the firm and what they
envision for it. Discovery of misconduct puts directors in a precarious situation that affects
their decisions, and few have delved into trying to understand directors’ thought processes in
this situation. This is important because directors lie at the heart of many important firm
decisions, but extant studies focus more on what everybody else will think, as opposed to
what the directors themselves are thinking, about their decisions.
We also complement existing research on executive succession (Berns & Klarner, 2017).
It is natural to evaluate a CEO successor choice in terms of observable metrics, such as how
capital markets react to the choice or how information intermediaries interpret the selection.
These are, after all, important proxies of the quality of the choice that directors made and
reliable indicators of the likelihood that the new CEO will be successful (Shen & Cannella,
2002). These metrics, though, do not take into account how directors feel after their firm has
engaged in misconduct or how those feelings might affect their decision making when choos-
ing a new CEO. Image theory helps capture director responses to the situation by explaining
how their changing image of the firm’s value and trajectory images might shape their choice
of who will be the next person to run the firm.
We build on recent studies that explore the extent to which a CEO’s early life experiences
affect corporate outcomes (Bernile et al., 2017; Kish-Gephart & Campbell, 2015; Martin
et al., 2016). Prior studies have focused on issues such as family income/social standing,
military experience, and elite education (Benmelech & Frydman, 2015). We add to this body
of work by incorporating exposure to a religious environment at a young and impressionable
age. Like other studies in this area, our findings indicate that early life experiences may affect
a leader’s ability to generate specific outcomes for their organization.
Our findings provide insights into the effect of CEO successor selection on the likelihood
of misconduct, which may be important for at least two key reasons. The first pertains to
protecting the firm from future misconduct. Following an instance of corporate misconduct,
directors are responsible for identifying and correcting problems. Our findings show they can
increase the effectiveness of executive succession as a corrective mechanism (Hersel,
Helmuth, Zorn, Shropshire, & Ridge, 2019). The second pertains to protecting directors from
the adverse consequences of choosing the wrong successor. Following misconduct, directors
are motivated to choose a successor that will resolve systemic problems and steer the ship
away from nefarious behavior. Their choice has consequences for their own careers because
choosing a CEO that later engages in misconduct could spell an end to a director’s career
(Marcel, Cowen, & Ballinger, 2017).
Limitations and Future Research

One limitation of our work pertains to our sample. The small sample size of Study 2 is not
ideal. Future research might attempt to improve on this by incorporating a snowball sampling
technique. It is also important to note that our Study 2 sample was more diverse in terms of
gender and race than the composition of a typical board of directors. This might call into
question the generalizability of our findings to boards that are more homogenous than the
respondents in our sample. Study 1 also has a sampling limitation in that we were unable to
obtain from archival sources the educational background of a fairly large number of CEOs.
Future research could seek to extend our findings by carefully seeking historical information
for each CEO not in our educational database (e.g., via individualized searches, phone calls,
and alumni databases).
Another limitation is that we cannot measure the cognitive schema of directors. We
develop arguments about aspects of the value image that will be salient (e.g., ethics,
performance) to directors and the changing nature of their trajectory image, but we can-
not assess the images directly. As a result, we are limited to (a) confirming that the pre-
dictions of image theory align with what is happening in the marketplace and (b) testing
the thought process in our second study. Neither of these approaches incorporates direct
measures of images directors form following organizational misconduct. We expect a
qualitative study with in-depth interviews of directors and open-ended questions about
the images they form would be a good approach to addressing this problem. A qualitative
study would also help address the concern that our financial misconduct measure can
capture only misconduct that is both committed and detected, not misconduct that goes
undetected.
The nature of our data collection did not allow us to measure the personal religiousness of
CEOs (we ask about the religiousness of the directors in our policy capturing as a control
variable). Studies on religiosity show that when denominations maintain stringent require-
ments for members of their group (e.g., abstention from alcohol, mandatory attendance),
individuals adhere to the denomination’s moral code of conduct (Sosis & Bressler, 2003).
Future research might consider differences between types of affiliations. Relatedly, we rely
on university affiliation as a measure of religiousness. We cannot be sure the extent to which
this would correlate with direct measures if we surveyed CEOs. For example, the World
Values Survey (www.worldvaluessurvey.org) uses a range of measures to capture religiosity
on a national level, which could be a useful starting point for an individual-level survey. The
spiritual well-being measure (Bormann, Liu, Thorp, & Lang, 2012) provides another possi-
ble avenue for surveying CEOs about religiousness. Future research might leverage these
tools for direct measures of CEO religiosity.
Similarly, scholars might build on our ideas to incorporate other indicators of moral prin-
ciples beyond religion, such as charitable work or care for the environment. For example,
Payne Moore, Bell, and Zachary (2013) describe how CEOs use rhetoric to establish an
organizational virtue orientation. This line of study could inform the successor selection lit-
erature because CEO candidates’ espoused ethics are likely to be important to directors.
Researchers can use annual statements to shareholders or transcripts of earnings calls to
qualitatively assess a CEO’s ethical tone (McKenny, Aguinis, Short, & Anglin, 2018). The
virtue orientation CEOs adopt may not be an accurate predictor of their ethical principles
(Bergh et al., 2014), but it could be something directors consider when choosing a CEO.
Future studies could examine, for instance, data on corporate social responsibility either as
an added control or as an alternative explanatory mechanism.
A final limitation of our work pertains to the potential for nonrandom assignment in our
moderating hypothesis. If there is something fundamentally different about CEO selection
in one industry as opposed to another, it could change our results. For instance, it could be
that CEO selection is a more common decision that directors have to make in some indus-
tries because they are more likely to remove the CEO for misconduct. We partially address
this with our difference-in-differences supplementary analysis, because we show that non-
random assignment across industries is not biasing our results. However, to address this
fully would require us to know more about whether the decision directors face about CEO
selection in industries where misconduct is common is different, in some meaningful way,
from the same decision in industries where misconduct is rare. It is difficult for us to do so
with the data we have.
Conclusion
Directors have a dearth of reliable information about candidates’ moral principles. As a
result, we find that in the aftermath of corporate misconduct, they attend to the religious
affiliation of candidates’ alma maters, and that strategy is effective. Moreover, directors of
firms that operate in industries where misconduct is a relatively common occurrence are the
least likely to choose, but the most likely to benefit from, a CEO with a degree from a reli-
gious university.
ORCID iD
Brian L. Connelly https://orcid.org/0000-0003-1804-8654
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924119

Searching for a Sign: CEO Successor Selection in

Keywords: succession; boards of directors; cognitive perspectives; corporate governance

Religiosity and Misconduct

Study 1: S&P 1500 Firms

Moderating variable. To measure the prevalence of financial misconduct in an industry,

1. Financial misconduct 0.05 0.22 —

Note: N = 10,207. TMT = top management team.

Variable Model 1 Model 2 Model 3 Model 4

Financial misconduct 0.54 0.55 0.90

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Variable OLS OLS OLS Logit Logit Logit OLS

Religious-university CEO −0.04 −0.07 −0.01 −0.67 −1.01 −0.47

Yi ,t +1 = αt + δi + β1 × Post i ,t +1 + β2 × Post i ,t +1 × Religiousi + γ × X i ,t + εi ,t (1)

Prestigious universities. To gain a deeper insight into the role of religious-university

Variable P(M) P(D|M)

Religious-university CEO −0.13

Variation in religiousness. To consider potential differences in the degree of religious-

Study 2: Corporate Directors

Sample and Measures

Estimation and Results

for i = 1, . . . , 4 scenarios and j = 1, . . . , 32 respondents. Y represents respondents’ ratings

Variable Model 1 Model 2

Financial misconduct 1.22 2.03

Note: Coefficients shown with p values reported in brackets (two-tailed tests).

Implications for Research and Practice

Limitations and Future Research

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