52 Pages Posted: 15 Mar 2006 Last revised: 16 Mar 2010
Date Written: December 26, 2009
We document the first systematic evidence on the characteristics and economic consequences of firms subject to employee allegations of corporate financial misdeeds. First, compared to a control group that avoided public whistle-blowing allegations, firms subject to whistle-blowing allegations were characterized by unique firm-specific factors that led employees to expose alleged financial misdeeds. Second, on average, whistle-blowing announcements were associated with a negative 2.8% market-adjusted five-day stock price reaction and this reaction was especially negative for allegations involving earnings management (-7.3%). Third, compared to a control group that exhibits similar characteristics, firms subject to whistle-blowing allegations were associated with further negative consequences including earnings restatements, shareholder lawsuits, and negative future operating and stock return performance. Finally, whistle-blowing targets exposed by the press were more likely to make subsequent improvements in corporate governance. Our results suggest whistle-blowing is far from a trivial nuisance for targeted firms, and on average, appears to be a useful mechanism for uncovering agency issues.
Keywords: whistle-blowing, corporate governance, fraud
Suggested Citation: Suggested Citation
Bowen, Robert M. and Call, Andrew C. and Rajgopal, Shivaram, Whistle-Blowing: Target Firm Characteristics and Economic Consequences (December 26, 2009). AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Papers. Available at SSRN: https://ssrn.com/abstract=890750 or http://dx.doi.org/10.2139/ssrn.890750