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Whistle-Blowing: Target Firm Characteristics and Economic Consequences

52 Pages Posted: 15 Mar 2006 Last revised: 16 Mar 2010

Robert M. Bowen

University of San Diego - Department of Accountancy; University of Washington - Foster School of Business

Andrew C. Call

Arizona State University (ASU) - School of Accountancy

Shivaram Rajgopal

Columbia Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 26, 2009

Abstract

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

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

Robert M. Bowen

University of San Diego - Department of Accountancy ( email )

223 Olin Hall
5998 Alcalá Park
San Diego, CA
United States
619.260.2385 (Phone)

HOME PAGE: http://www.sandiego.edu/business/directory/biography.php?id=1232

University of Washington - Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States

HOME PAGE: http://faculty.washington.edu/rbowen/

Andrew C. Call

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

Tempe, AZ 85287
United States

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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