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Corporate Culture and Financial Reporting Risk: Looking Through the Glassdoor

58 Pages Posted: 4 Apr 2017 Last revised: 1 Oct 2017

Yuan Ji

The Hong Kong Polytechnic University

Oded Rozenbaum

George Washington University - School of Business

Kyle T. Welch

George Washington University - School of Business

Date Written: June 1, 2017

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. Consistent with the boiler room effect, we find that a negative corporate climate is also associated with an increased likelihood of narrowly meeting or beating market earnings expectations. Conversely, we find job satisfaction and positive employee opinions of senior leadership to be associated with lower abnormal accruals. 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

Suggested Citation

Ji, Yuan and Rozenbaum, Oded and Welch, Kyle T., Corporate Culture and Financial Reporting Risk: Looking Through the Glassdoor (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2945745

Yuan Ji

The Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon, Hong Kong
Hong Kong

Oded Rozenbaum

George Washington University - School of Business ( email )

Washington, DC 20052
United States
202-994-5992 (Phone)

Kyle T. Welch (Contact Author)

George Washington University - School of Business ( email )

Washington, DC 20052
United States

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