Are Meritless Whistleblower Complaints Detrimental?
49 Pages Posted: 27 Aug 2023 Last revised: 16 Feb 2024
Date Written: August 22, 2023
There are significant public concerns that many whistleblowing allegations of financial misconduct are meritless and hurt shareholder value by squandering managerial effort and corporate resources. Using a sample of whistleblowing cases filed under Section 806 of the Sarbanes and Oxley Act, we find no evidence that meritless allegations of financial misconduct negatively affect share prices. Instead, we uncover that these allegations prompt heightened board and auditor efforts. Moreover, corporate culture related to integrity and respect for employees improves after these allegations. Furthermore, the positive spillover effect extends to the financial reporting quality of other firms connected through common directors and auditors. Overall, our study suggests that meritless allegations of financial misconduct by employees do not hurt shareholder value and, in fact, create a significant social benefit in terms of financial reporting quality.
Keywords: Meritless Whistleblower Complaints, Shareholder Welfare, Deterrence Effect, Managerial Efforts, Financial Restatements.
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