Can Whistleblowing Improve Organizational Effectiveness? Evidence from Financial Reporting Misconduct

The theory of prosocial organizational behavior predicts that target firms’ responsiveness can influence how whistleblowers perceive organizational justice. This responsiveness also affects whistleblowers’ willingness to undertake what is referred to as “extra-role” citizenship behavior. In this study, we examine whether target firms respond to external whistleblowing reports by adjusting their investment in organizational capital, generally defined as investment in employee welfare, operational processes, and communications. Insufficient organizational capital can lead to lax internal controls and low worker morale, which increases the odds of financial misconduct and subsequent whistleblowing. We collect a sample of employee external whistleblowing cases related to financial reporting misconduct, obtained via a Freedom of Information Act (FOIA) request and a hand-collected sample from public media over the 1990-2018 period. Our results show strong evidence that whistleblowing target firms increase investment in organizational capital following the allegations. Further, we find that whistleblowing target firms with increased organizational capital become more productive and have a higher firm value in the post-allegation period. Our findings have important policy and managerial implications