Whistle-Blowing: Target Firm Characteristics and Economic Consequences

• Published in: The Accounting review Vol. 85; no. 4; pp. 1239 - 1271
• Main Authors: Bowen, Robert M., Call, Andrew C., Rajgopal, Shiva
• Format: Journal Article
• Language: English
• Published: Sarasota American Accounting Association 01.07.2010
• Subjects: Analysis; Business structures; Chief executive officers; Corporate finance; Corporate governance; Creative accounting; Earnings management; Employees; Enterprises; Financial information; Financial reporting; Law; Lawsuits; Mismanagement; P values; Revenue; Scandals; Shareholders; Stock markets; Studies; Whistleblowing; Whistles
• ISSN: 0001-4826; 1558-7967
• DOI: 10.2308/accr.2010.85.4.1239

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 controls 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.