THE DIFFUSION OF ILLEGAL INNOVATIONS AMONG MANAGEMENT ELITES.

Top managers learn about innovative business practices in many ways; they observe other firms, maintain memberships in trade associations, discuss methods with other executives and outside board members, and read the business press. But how do illegal innovations diffuse among management elites? Illegality requires stealth and opaqueness; one cannot simply vicariously observe others' illegal innovations from a distance, or learn about them from trade associations. To address this issue we examine the spread of the illegal innovation of backdating CEO stock options. We find that board of director interlocks, geographical social networks, and CEO power all play a role in the rise and spread of this illegal innovation.