Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options
57 Pages Posted: 8 Jun 2016
Date Written: June 7, 2016
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: Suggested Citation