Abstract
We document the first systematic evidence on the characteristics and economic consequences of firms subject to employee allegations of corporate financial misdeeds. First, compared to a control group that avoided public whistle-blowing allegations, firms subject to whistle-blowing allegations were characterized by unique firm-specific factors that led employees to expose alleged financial misdeeds. Second, on average, whistle-blowing announcements were associated with a negative 2.8 percent market-adjusted five-day stock price reaction; this reaction was especially negative for allegations involving earnings management (-7.3 percent). Third, compared to a control group that exhibits similar characteristics, firms subject to whistle-blowing allegations were associated with further negative consequences including earnings restatements, shareholder lawsuits, and negative future operating and stock return performance. Finally, whistle-blowing targets exposed by the press were more likely to make subsequent improvements in corporate governance. Our results suggest whistle-blowing is far from a trivial nuisance for targeted firms, and on average, appears to be a useful mechanism for uncovering agency issues.
Original language | English (US) |
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Pages (from-to) | 1239-1271 |
Number of pages | 33 |
Journal | Accounting Review |
Volume | 85 |
Issue number | 4 |
DOIs | |
State | Published - Jul 2010 |
Externally published | Yes |
Keywords
- Corporate governance
- Earnings management
- Financial misdeeds
- Whistle-blowing
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics