Can Whistleblowing Improve Organizational Effectiveness? Evidence From Financial Reporting Misconduct

Abstract

Background: While whistleblowing (WB) has attracted growing research interest in recent years, several critical WB-related issues remain underexplored. Purpose: This study examines the impact of external WB allegations on a firm’s organizational capital (OC). Such allegations often indicate management’s failure to address employee concerns internally, spotlighting potential deficiencies in internal reporting systems, employee communication, training, and trust in organizational fairness. To mitigate reputational damage, restore employee trust, and prevent future incidents, we posit that WB firms respond by increasing OC investment. Research Design: We employ a difference-in-differences approach, comparing OC changes in WB-targeted firms with those in a propensity score-matched control sample. Study Sample: Our dataset includes employee WB allegations obtained from OSHA (via a Freedom of Information Act request) and a hand-collected sample from public media. Results: We find that WB firms significantly increase OC in the post-allegation period. Additionally, higher OC investment is linked to fewer future WB incidents. The decision to strengthen OC is primarily influenced by employees, long-term institutional investors, and prior OC deficiencies, rather than by WB case credibility or CEO characteristics. Conclusions: Our findings indicate the importance of aligning long-term investment strategies and employee benefits with broader corporate goals to foster a responsive and adaptive organizational culture.