by Aiyesha Dey, Jonas Heese, and Gerardo Perez Cavazos
Regulators trying to curtail financial fraud, government procurement fraud, or tax fraud, among many other types of misconduct, increasingly rely on whistleblowers for tips. However, the concern is that whistleblowers face severe costs to help uncover corporate fraud. Yet, there is no large-sample evidence on the consequences for whistleblowers. We examine the costs for whistleblowers using information from lawsuits, a professional networking site, and background checks for up to 1,168 whistleblowers. In particular, we investigate the career, financial, and social consequences for whistleblowers that filed lawsuits under the False Claims Act (FCA) against firms accused of defrauding the government.
Costs for Whistleblowers
We start our analysis by documenting the immediate consequences of employee whistleblower allegations, as reflected in their treatment at their firms. Employee whistleblowers report in their lawsuits that firms typically ignore the issue raised by them, and, in 10% of the allegations, firms try to cover-up the issue internally. In only 6% of cases, firms open an internal investigation. We also find a high prevalence of retaliation in the short term. Employee whistleblowers report that firms typically retaliate against them via firing (in more than one third of all cases), harassment (about 16% of all cases), threats (about 10% of all cases), and demotions (about 6% of all cases). In only 21% of all cases, the firm does not retaliate against an employee whistleblower.
To examine subsequent career consequences for whistleblowers, we use a professional networking site to collect career information from the profiles of 89 whistleblowers. The average whistleblower finds a new job approximately within one year. In 52% of the cases, the next job is better or equivalent to the one at the accused firm, while 10% of employees’ next job is worse, and 21% of employees become self-employed. We also find that 16% of whistleblowers move to another state for their next job and 35% change industry. To examine professional consequences over an extended period, we examine the most recent job and find that in 58% of the cases, it is better or equivalent to the job at the accused firm. Over this longer period (on average eight years after blowing the whistle), 24% of whistleblowers work in a different state, and 42% in a different industry.
While the previous findings rely on whistleblowers’ self-reported consequences (which could be subject to bias), we also examine the consequences for employee whistleblowers by conducting background checks using information from a comprehensive set of public records. We manually search records for each whistleblower and collect time-series data related to financial and social consequences. We focus on financial and social consequences as prior research concludes that whistleblowers face substantial costs in both categories (e.g., Dyck et al. 2010). Regarding financial consequences, we collect data about the median income in the neighborhood where the whistleblower resides, judgments and liens, and bankruptcies. In terms of social consequences, we collect data on divorces, legal records, and traffic violations. For this analysis, we construct a matched sample by finding individuals with similar attributes who worked for the same firm and held a position similar to that of the whistleblower at the lawsuit filing time. We find that whistleblowers’ annual income is lower by 7.3% (or $5,500) to 8.6% (or $6,500) one, five, and ten years after the lawsuit filing. In the short term, whistleblowers are also more likely to face judgments and liens. However, we do not find an increase in bankruptcy likelihood, and the likelihood of judgments and liens is economically modest in the medium and long terms. Interestingly, most of the costs are concentrated among rank-and-file employees, while middle- and upper-management whistleblowers do not appear to incur substantial costs. We do not find evidence of meaningful social costs.
Conclusions
Our study extends prior research on the costs of whistleblowing (e.g., Dyck et al. 2010) by examining a larger sample of whistleblowers, using a wide variety of data sources, and providing insights into the longer-term consequences. Our results indicate that whistleblowers—especially rank-and-file employees—are subject to substantial financial costs. These results emphasize the importance of financial compensation for whistleblowers—for example in the form of cash-for-information whistleblower programs. In our setting, which focuses on whistleblowing under the FCA, whistleblowers can expect to receive approximately $140,000 for blowing the whistle. Cash rewards help compensate whistleblowers for their income loss and ensure that whistleblowers are willing to share their information with regulators. Our findings can help regulators design more effective whistleblower programs, and inform firms and whistleblowers about the potential costs of whistleblowing under the FCA.
The full paper is available for download here.
Aiyesha Dey is the Hoegh Family Associate Professor of Business of Administration, Jonas Heese is the Marvin Bower Associate Professor, and Gerardo Perez Cavazos is an Assistant Professor of Business Administration at Harvard Business School.
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