Investigating the Role of Executive Intrafirm Alumni Networks in Top Management Fraud: Multilevel Study in China’s Construction Industry

Abstract

To explore factors that influence the likelihood of committing fraud in the construction industry, this study concentrated on senior executives and tested whether some characteristics at the individual and firm levels have impacts on the likelihood of fraud committed by top management. Based on social network theory, this study first proposes that intrafirm alumni networks may increase the probability of senior executives engaging in corrupt behavior. Then the study explored whether the effect of executives’ alumni networks on their wrongdoings is influenced by external and internal corporate governance measures. To verify the hypotheses, this study collected data on 2,017 senior executives from 118 construction companies in China from 2013 to 2021. Because of the multilevel structure of the data, hierarchical linear modeling was used. The results show that alumni networks have a significant positive effect on top management fraud. The effect is weakened by external auditing, altered by board independence, and strengthened by the size of the board of directors and the size of the supervisory board. This multilevel research contributes to advancing the understanding of managers’ fraudulent behavior within an organization and extends the literature on social networks and corporate governance in the construction industry. This study addressed fraud in the construction industry by examining the role of top managers and their social networks. Corporate governance was considered to investigate variations in the impact of social networks on top management fraud across firms. The findings demonstrate that top managers with extensive alumni networks are more susceptible to engaging in fraud, particularly in firms with an overabundance of independent directors, large boards, or non-Big 4 auditing firms. To mitigate this issue in the short term, companies are advised to redesign their corporate hiring policies and governance systems to ensure that preferential treatment based on alumni networks is avoided. Promoting diversity among executives can help maintain a well-balanced top management team. To ensure the appropriate utilization of alumni networks, implementing stringent monitoring by two boards is suggested, through adjustments in board structure, such as enhancing board diversity. In the long term, policymakers should refine company laws and promote the engagement of Big 4 auditing firms. These measures are intended to combat fraud and enhance corporate governance, fostering a more transparent business environment. By implementing these strategies, the construction industry can make significant progress in combating fraud and cultivating a trustworthy business environment.