Blinded by Incentives: Do Rank and File Stock Options Deter Employee Whistle-Blowing?
43 Pages Posted: 17 Mar 2012
Date Written: Febraury 15, 2012
The Dodd-Frank Act (2010) seeks to encourage whistle-blowing by offering financial rewards to those who bring corporate fraud to light. Firms can counter this legislative action by giving their employees incentives, via rank and file stock options, to remain quiet about financial irregularities. We examine two samples of firms accused of committing financial reporting violations and find that those that grant more rank and file stock options are more likely to avoid employee whistle-blowing, consistent with our hypothesis. Moreover, firms involved in financial reporting violations grant more rank and file stock options relative to a control sample of non-violation firms, pointing to their efforts to discourage whistle-blowing. An investigation into firms’ use of broad based cash profit-sharing programs yields similar though weaker results.
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