Mutual Monitoring: How TMT Faultlines Affect Corporate Fraud

Abstract We develop and test a theoretical model to investigate the effects of faultlines within the top management team (TMT) on corporate financial fraud. We propose that TMT faultlines can generate mutual monitoring among factional subgroups in the executive suite, which reduces fraudulent behavior. We also examine the contingent roles of subgroup configuration and the TMT members’ tenure overlap in shaping the relationship between TMT faultlines and financial fraud. The mutual monitoring effect is likely to be stronger when the TMT has a balanced subgroup configuration and shorter TMT members’ tenure overlap. We test our argument in the context of publicly listed firms in China. This article extends the mutual monitoring perspective of corporate governance and has important research implications for the corporate financial fraud literature.