CLS Blue Sky Blog

Do Meritless Whistleblower Claims Hurt Companies and Shareholders?

A number of regulations encourage whistleblowers to provide tips on corporate financial misconduct. For example, as a part of the 2011 Dodd-Frank Act, Congress enacted a whistleblower program to reward eligible individuals with up to 30 percent of the monetary penalties resulting from their tips. The Securities and Exchange Commission (SEC) says the program has provided valuable resources for investigating and detecting corporate misconduct (e.g., Ceresney 2016). However, the financial incentives inevitably lead to many meritless claims (e.g., Earle and Madek 2005), which significantly delay SEC processing of valid tips (Wall Street Journal 2018). There are significant concerns that meritless whistleblowing hurts the program’s efficiency and creates substantial costs (e.g., Department of Justice 2018).

In a new paper, we investigate the economic consequences of meritless whistleblower claims for firms and shareholders by empirically examining how they affect shareholder wealth and firms’ future financial reporting behavior.

The net effect of meritless claims by whistleblowers on shareholder value is unclear. On the one hand, they may impose a significant cost by wasting managers’ time and resources, damaging a firm’s reputation, and lowering its valuation. On the other hand, the negative impact on valuation may be limited because whistleblowing tips do not convey actual information about corporate misconduct. Further, regardless of their merit, whistleblower claims may alert auditors and directors to the risk of potential misconduct, prompting them to spend more effort monitoring the firm’s financial reporting. Consequently, meritless whistleblowing may lead to greater monitoring, which can deter financial reporting manipulation and increase firm value.

To investigate these possibilities, we obtain a sample of whistleblower cases filed between 2010 to 2016 from the Occupational Safety and Health Administration (OSHA). These cases were filed under Section 806 of the Sarbanes-Oxley Act (SOX), and all involve allegations of potential corporate financial misconduct. We infer the merit of whistleblowers’ claims from the SEC’s decision to accept or reject them. Consistent with prior literature, we find a negative effect of meritorious whistleblower claims on firm value. However, we do not find a significant association between the incidence of meritless claims and firm value. These findings suggest that the stock market efficiently distinguishes between valid and meritless tips and that meritless whistleblowers, on average, do not reduce shareholder wealth.

Further, we document both benefits and costs of meritless whistleblowing claims to shareholders. Consistent with the notion that these cases deter aggressive financial reporting, we find that firms facing meritless allegations of financial misconduct in prior years are  a significantly less likely to restate their financial statements. To shed light on the mechanisms behind this deterrent effect, we establish that auditors and boards increase monitoring after meritless whistleblower cases occur. This effect is stronger for firms with higher auditor effort and more directors with financial expertise. In addition, directors and auditors of firms facing meritless claims also increase monitoring of potential misconduct in other firms that they work for, creating a spill-over effect. On the other hand, we provide evidence that meritless whistleblowing reduces managers’ efforts in other important areas. As discussed above, the net effect on firm values is insignificant.

Our study suggests that meritless claims from whistleblowers do not hurt shareholder value on average and in fact create a social benefit in the form of more accurate financial reporting. These findings do not support the concern that the many meritless whistleblowing tips harm firms and their shareholders. Admittedly, there are other potential social costs we do not consider, such as the time and effort that regulators spend on processing the tips. . Nevertheless, these findings have important implications for understanding the consequences of recent policies that encourage whistleblowers. This is especially important given that the SEC is considering increasing whistleblower payments. In contrast, the Department of Justice has expressed concerns about the costs of meritless whistleblowers and is considering measures to curb such cases (U.S. Department of Justice 2018).


Ceresney, A. 2016. The SEC’s Whistleblower Program: The Successful Early Years, September 14, 2016. Available at

Earle, B., and G. A. Madek. 2005. The New World of Risk for Corporate Attorneys and Their Boards Post-Sarbanes-Oxley: An Assessment of Impact and a Prescription for Action. Berkeley Business Law Journal, 2, 185.

Department of Justice (DoJ). 2018. Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3739 (c)(2) (A). Washington DC.

Forbes. 2018, Whistleblower: Warrior, Saboteur or Snitch? July 5, 2018, Retrieved from:

Forbes. 2019, How The Whistleblower Is Providing A Tutorial In Corporate Governance, September 30, 2019, Retrieved from:

Wall Street Journal. 2018. SEC whistleblower payouts slow Amid Deluge of Reward Seekers. August 6, 2018, Available at:

This post comes to us from Yangyang Fan at Hong Kong Polytechnic University’s  School of Accounting and Finance, Gilles Hilary at Georgetown University’s McDonough School of Business, and Mark (Shuai) Ma at the University of Pittsburgh. It is based on their recent article, “Are Meritless Whistleblower Complaints Detrimental to Employers?” available here.

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