Whistle-Blowing: Target Firm Characteristics and Economic Consequences

Posted: 24 Mar 2010

See all articles by Robert M. Bowen

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics; University of Washington - Foster School of Business

Andrew C. Call

Arizona State University (ASU) - School of Accountancy

Shivaram Rajgopal

Columbia Business School

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Date Written: February 26, 2010

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, financial misdeeds, earnings management, corporate governance

JEL Classification: M41

Suggested Citation

Bowen, Robert M. and Call, Andrew C. and Rajgopal, Shivaram, Whistle-Blowing: Target Firm Characteristics and Economic Consequences (February 26, 2010). Accounting Review, Vol. 85, No. 4, 2010, Available at SSRN: https://ssrn.com/abstract=1560128

Robert M. Bowen

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
206.334.0911 (Phone)

HOME PAGE: http://www.chapman.edu/our-faculty/robert-bowen

University of Washington - Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States
206.334.0911 (Phone)

HOME PAGE: http://foster.uw.edu/faculty-research/directory/robert-bowen/

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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