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Shares in return for silence: Are companies bribing employees?

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Granting employees more stock options can reduce the risk of whistle-blowing allegations. Firms involved in financial reporting violations often increase staff members’ stock options in an attempt to keep them quiet.

Those are the main findings from the study “Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options”. The study examined 784 cases at 663 different companies that were subject to class action shareholder litigation in the United States from 1996 to 2011.

According to the study, employees at firms involved in financial reporting violations received more stock options than their counterparts at firms who stick to the rules.

On average, dodgy firms granted 2.49% of the company’s total outstanding shares to employees during the period between misreporting and being caught. On the other hand, companies who didn’t misbehave only gave their staff 1.62% of total outstanding shares.

The study also found a difference between the amount of stock options violating companies granted their staff depending on whether they were misbehaving at the time. During a period of misreporting, stock options granted went up by an average of 0.32%. After it was discovered, they went down to just 1.67% of total shares.

The authors of the study concluded that firms purposefully grant staff more shares in order to encourage them to facilitate the company’s misbehaviour, as well as discourage them from blowing the whistle.

“It’s a straightforward story”, Shivaram Rajgopal, co-author and a professor of accounting and auditing at Columbia Business School, told the Wall Street Journal. “Companies compensate you for not speaking up.”

Worryingly, the bribery tactics seem to work. According to the findings, dodgy firms that grant more stock options during violation years are more likely to avoid employee whistle-blowing allegations.

The study is expected to be published in an upcoming issue of the Journal of Accounting and Economics.

ALSO READ: Why Hong Kong managers need whistleblowing policies

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