Corporate Culture and Financial Reporting Risk: Looking Through the Glassdoor

Abstract

We study whether financial reporting risk is associated with job satisfaction, company culture, and opinions of senior leadership. We use novel data on employees’ perspectives obtained from the website Glassdoor, covering 14,282 firm-years in the period 2008-2015. We argue that poorly implemented performance objectives leads to pressure and creates a boiler room effect, negatively impacting the corporate climate of the firm and increasing the propensity to manipulate performance metrics. We find that firms with lower levels of job satisfaction (as measured by employees) and lower levels of “culture and values” are more likely to be subjected to SEC fraud enforcement actions and securities class action lawsuits. We also find that the association between firms’ culture and financial reporting risk is stronger for firms with weaker board independence. Thus, the work environment, as perceived by employees, appears to play a critical role in financial reporting risk.

Keywords: corporate culture, culture, fraud, SEC, employee feedback, job satisfaction, Glassdoor, financial reporting, governance

JEL Classification: M14, M12, M54, M41