Investors tend to pay heed to whistleblower reports of financial fraud despite company denials, a new study suggests.

The research in the July issue of The Accounting Review, a bimonthly journal of the American Accounting Association, suggests that media reports of such allegations lead to multiple woes for targeted companies, including a significant depression of their stock prices not just for days but for years.

“While it is common for companies to question the sanity of whistleblowers, it would appear from our findings that the stock market disagrees,” said Shiva Rajgopal of the Goizueta Business School at Emory University, who carried out the study with Robert M. Bowen of the Foster School of Business of the University of Washington and Andrew C. Call of the Terry College of Business at the University of Georgia.

“There has been surprisingly little research on whether whistleblower allegations are economically significant events with meaningful consequences for targeted firms,” he added. “Our findings suggest strongly they are, and what seems equally plain is the power of the press in all this.”

The study analyzed the stock performance of 81 companies after whistleblower allegations of financial misconduct were reported in the media. The professors found that in the five days surrounding such press reports, the stocks of the accused companies experienced a 2.84 percent average drop in price compared to the market as a whole. The relative drop was 7.3 percent when the allegations concerned earnings management.

There were also long-term weaknesses in stocks subsequent to press accounts of whistleblowing. The professors found the median stock performance of the accused companies to be significantly lower over the course of the next two years than that of similar firms that were not beset by whistleblowing.

In addition, within three years of the time that whistleblower stories appeared in the media, 17.9 percent of the firms involved had to restate their financial results, and 26.9 percent were sued for financial misconduct.  

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