Are Certain Cities More Prone to Financial Misconduct?

December 20, 2016
by Melinda Battenberg

U.S. companies examine many elements in deciding where to locate their businesses – everything from the cost of labor, taxes, real estate prices and utilities to non-cost factors like workforce skill level, infrastructure, regulations, cost of living and quality of life. But, is there a way to determine which city has the most reliable, scrupulous employees? New research from Associate Professor Christopher Parsons at the Rady School of Management examines how the culture of a city contributes to the trustworthiness of employees.

Financial misconduct rates differ widely between major U.S. cities, about as much as between industries. Using a dataset of financial misconduct collected since 1970, Parsons and his fellow researchers found that financial mismanagement disproportionately clusters in certain cities. They also determined that city-level culture, rather than differences in enforcement or company characteristics, best accounts for these patterns.

Parsons examined the culture of the cities by using the behavior of its residents, such as spousal infidelity, rather than the population attributes like age, wealth or religious background. For example, financial misconduct rates are strongly related to other unethical behavior in the city, involving its politicians, doctors, and (potentially unfaithful) spouses. The unethical behavior was measured by data on federal convictions for corruption-related crimes by elected officials, information on doctors who receive payments from drug companies and their subsequent prescriptions, and data on registered users of the extramarital affair website Ashley Madison.

The research found that Miami, St. Louis, Dallas, Houston, New York, Los Angeles, Washington, D.C., Denver, Chicago and San Francisco are cities where financial misconduct is most prevalent. Indianapolis, Seattle, Minneapolis, Cleveland, Atlanta, Boston, Orlando, Phoenix, Philadelphia and Detroit had the least amount of financial misconduct. The research suggests that city-specific culture factors play a role in the trustworthiness of employees – a valuable lesson for companies when determining where to locate.

Discover what your Rady MBA can do for you. Click here.

About Professor Christopher Parsons

Prior to coming to the Rady School, Parsons was an Assistant Professor of Finance at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. Before his position at the Kenan-Flagler School, Parsons was an Assistant Professor of Finance at the Desautels Faculty of Management at McGill University, Montreal. Parsons earned his Ph.D. in Finance at the McCombs School of Business at the University of Texas at Austin. He earned his B.S. with Highest Honors in Chemical Engineering.