Cash-for-Information Whistleblower Programs: Effects on Whistleblowing and Consequences for Whistleblowers

Aiyesha Dey is Høegh Family Associate Professor of Business Administration, Jonas Heese is Marvin Bower Associate Professor of Business Administration, and Gerardo Pérez Cavazos is Assistant Professor of Business Administration, all at Harvard Business School. This post is based on their recent paper.

Cash-for-information whistleblower programs have gained momentum as a regulatory tool to enforce corporate misconduct. Yet, little is known about how financial incentives affect whistleblowers’ decisions to report potential misconduct to authorities. Similarly, there is no large-sample evidence on the consequences for whistleblowers under these programs. We study these questions using over 5,000 whistleblower lawsuits brought under the False Claims Act (FCA) against firms accused of defrauding the government.

Effects of Financial Incentives

Proponents of cash-for-information programs point to the large number of tips that regulators receive from whistleblowers and the success in terms of cases and penalties imposed on corporations. They argue that these programs simply compensate whistleblowers for taking the risk of reporting wrongdoing to the authorities. In contrast, critics argue that cash-for-information programs motivate employees to file meritless allegations with regulators that waste resources of regulators and accused firms alike. Further, they argue that these programs incentivize employees to share information directly with regulators, instead of reporting the issue internally, which might be preferable, as firms can better assess tips in the context of their business and better resolve issues than the authorities.

To examine the effects of financial incentives on whistleblowing, we exploit staggered decisions taken by U.S. Courts of Appeals that increase the financial incentives for whistleblowing under the FCA in specific judicial districts. We find the following three effects. First, we find that whistleblowers file a greater number of lawsuits in district courts following decisions that increase financial incentives for whistleblowing. However, we do not find a reduction in the fraction of allegations reported internally before the filing of a lawsuit. Second, we find that the DOJ increases the investigation length for allegations filed in treated courts. Third, we find an increase in the percentage of DOJ-intervened lawsuits and the percentage of settled lawsuits.

In sum, these findings support the view that cash-for-information programs help to expose misconduct. Our findings show that whistleblowers respond to financial incentives by filing additional lawsuits, which the DOJ investigates for a longer period and that are more likely to result in a settlement. These findings are inconsistent with the critics’ view that greater financial incentives for whistleblowers primarily trigger meritless lawsuits.

Costs for Whistleblowers

However, the concern is that whistleblowers face severe costs to help uncover corporate fraud. Our second set of analyses investigates the career, financial, and social consequences for up to 1,168 whistleblowers under cash-for-information programs. We start by investigating the firms’ responses to employee whistleblower allegations. Employee whistleblowers report in their lawsuits that, in most of the allegations, firms 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. 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.

Next, we collect career information from the profiles of 89 whistleblowers from a professional networking site. 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. 16% of whistleblowers move to another state for their next job and 35% change industry. To assess longer-term consequences, 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 more extended period (on average eight years after the lawsuit filing), 24% of whistleblowers work in a different state, and 42% in a different industry.

Finally, we manually search public records for each whistleblower and collect time-series data related to financial (i.e., income, judgments, bankruptcies) and social consequences (i.e., 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. The expected reward for blowing the whistle is approximately $140,000, which seems to offset the financial costs, which are concentrated among rank-and-file employees. In terms of social outcomes, we do not find meaningful differences between whistleblowers and matched individuals across our measures.

Conclusions

Our study provides evidence on the effect of financial incentives on whistleblowing, a research area that is “woefully lacking” (Pope and Lee 2013). Our findings suggest that cash-for-information programs help expose corporate misconduct, as they result in a larger number of lawsuits, which the DOJ investigates for a longer period and that are more likely to result in a settlement. Our study also extends prior research on the costs of whistleblowing (e.g., Dyck et al. 2010) by studying a larger sample of whistleblowers, using a wide variety of data sources, and providing insights into the longer-term consequences. Finally, 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.

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