Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options

57 Pages Posted: 8 Jun 2016  

Andrew C. Call

Arizona State University (ASU) - School of Accountancy

Simi Kedia

Rutgers Business School

Shivaram Rajgopal

Columbia Business School

Date Written: June 7, 2016

Abstract

We find that firms grant more rank and file stock options when involved in financial reporting violations, consistent with managements’ incentives to discourage employee whistle-blowing. Violating firms grant more rank and file options during periods of misreporting relative to control firms and to their own option grants in non-violation years. Moreover, misreporting firms that grant more rank and file options during violation years are more likely to avoid whistle-blowing allegations. Although the Dodd-Frank Act (2010) offers financial rewards to encourage whistle-blowing, our findings suggest that firms discourage whistle-blowing by giving employees incentives to remain quiet about financial irregularities.

Keywords: misreporting, stock options, whistle-blowing

JEL Classification: M40, M41, M48

Suggested Citation

Call, Andrew C. and Kedia, Simi and Rajgopal, Shivaram, Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options (June 7, 2016). Call, A.C., Kedia, S., and Rajgopal, S. 2016. Rank and file employees and the discovery of misreporting: The role of stock options. Journal of Accounting & Economics (JAE), Forthcoming; Columbia Business School Research Paper No. 16-41. Available at SSRN: https://ssrn.com/abstract=2791690

Andrew C. Call

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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