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Whistle-Blowing: Target Firm Characteristics and Economic Consequences
Robert M. Bowen, University of Washington
Andrew C. Call, University of Georgia
Shiva Rajgopal, University of Washington
ABSTRACT. We document what we believe is the first systematic evidence on the characteristics and economic consequences of firms subject to employee allegations of corporate financial misdeeds over the years 1989-2004. Compared to an overall control group, firms subject to whistle-blowing events are characterized by scarce financial resources, rapid growth, capital market pressures, and poor governance. Compared to two control groups of firms subject to shareholder lawsuits and earnings restatements, whistle-blowing target firms tend to be large, successful, highly regarded, concentrated in sensitive industries and have a bureaucratic work culture. On average, a whistle-blowing announcement is associated with a negative 3% market-adjusted 3-day stock price reaction. Whistle-blower allegations are also associated with further negative consequences including earnings restatements, SEC enforcement actions, shareholder lawsuits and relatively poor future operating and stock price performance.
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