Internal corporate governance as a source of firm value: The impact of internal governance on the incidence of white collar crime

White collar crime can cost firms from 2–5% of their sales annually. The magnitude of the loss is significant, and there is little research into how to reduce this loss. Any solution to this problem must originate within the firm. This study begins the investigation of governance structures and their ability to impact the occurrence of white collar crime.; Governance can be external, as in the structure of ownership, the Board of Directors or the CEO, or it can be internal, as in the policies and procedures, the accounting system and the employee compensation of the firm. This study creates a framework relating external and internal governance to the occurrence of white collar crime. This study adopts a holistic and multi-variable approach to governance building on agency and organizational theories.; Firms that have announced a white collar crime from 1987–1998 form the basis of the sample. Each of these firms is then matched with a firm similar in size and scope, but from the year prior to the announcement. Governance variables are gathered from documents filed with the Securities and Exchange Commission (SEC) including the annual report, 10K and proxy statement for all of these firms. The final sample is 72 ‘crime firms’ and 72 ‘non-crime firms’.; First the level of value loss is investigated. Results indicate that the value loss over a three day window around the announcement day are statistically but not economically significant, representing about 1% of firm market value. However, when actual future performance is investigated, the commission of a crime has a negative and significant effect on return on assets (ROA) in the year following the crime, and more crimes generate significant negative ROA for three years following the crime.; Discriminant analyses indicate that firms with crime and firms without crime have significantly different governance structures, and subsequent logit and regression tests indicate that firms with fewer crimes have stronger policies and procedures and stronger liaison roles. The firms with fewer crimes may also have more employee contingent pay, higher morale, Boards paid with contingent compensation, fewer insiders on the Audit committee, and less Board ownership. Prior performance has little to do with the probability of occurrence of a crime.