The Deterrence Effect Of Whistleblowing On Peer Firms\u27 Financial Reporting Decisions

I examine the impact of whistleblowing allegations on the financial reporting behavior of peer firms. This study provides several important findings. First, industry peers exhibit decreases in accrual-based earnings management, real earnings management, and the likelihood of financial misreporting in the two years following a whistleblowing allegation. Second, following a whistleblowing allegation, peer firms exhibit greater conditional conservatism. Third, peer firms increase earnings transparency to respond to whistleblowing allegations with the intention of improving financial reporting quality. I find results are strongest when the whistleblowing event relates specifically to accounting fraud. Whistleblowing allegations at large firms have greater impact on peer firms\u27 post-whistleblowing financial reporting. Prior literature shows that whistleblowing allegations are associated with changes in the financial reporting of whistleblowing target firms; this paper provides evidence that whistleblowing allegations also impact peer firms\u27 financial reporting