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THEJOURNALOFFINANCE •VOL.LXV,NO.6 •DECEMBER2010 WhoBlowstheWhistleonCorporateFraud? ALEXANDERDYCK,ADAIRMORSE,andLUIGIZINGALES ABSTRACTToidentifythemosteffectivemechanismsfordetectingcorporatefraud,westudyall reportedfraudcasesinlargeU.S.companiesbetween1996and2004.WeÞndthat frauddetectiondoesnotrelyonstandardcorporategovernanceactors(investors,SEC, andauditors),butrathertakesavillage,includingseveralnontraditionalplayers (employees,media,andindustryregulators).Differencesinaccesstoinformation, aswellasmonetaryandreputationalincentives,helptoexplainthispattern.In- depthanalysessuggestthatreputationalincentivesingeneralareweak,exceptfor journalistsinlargecases.Bycontrast,monetaryincentiveshelpexplainemployee whistleblowing.THELARGEANDNUMEROUS corporatefraudsthatemergedintheUnitedStates attheonsetofthenewmillenniumprovokedanimmediatelegislativeresponse intheSarbanes-OxleyAct(SOX).Thislawwaspredicatedupontheideathat theexistinginstitutionsdesignedtouncoverfraudhadfailed,andthattheir incentivesaswellastheirmonitoringshouldbeincreased.Thepoliticalimper- ativetoactquicklypreventedanyempiricalanalysistosubstantiatethelawÕs premises.Whichactorsbringcorporatefraudtolight?Whatmotivatesthem? Didreformstargettherightactorsandchangethesituation?Candetectionbe improvedinamorecost-effectiveway? Toanswerthesequestions,wegatherdataonacomprehensivesampleof allegedcorporatefraudsthattookplaceinU.S.companieswithmorethan 750milliondollarsinassetsbetween1996and2004.Afterscreeningfor frivoloussuits,weendupwithasampleof216casesofallegedcorporate frauds,whichincludeallofthehigh-proÞlecasessuchasEnron,HealthSouth, andWorldCom. DyckisattheUniversityofToronto;MorseisattheUniversityofChicagoandNBER;and ZingalesisattheUniversityofChicago,NBER,andCEPR.AlexanderDyckthankstheConnaught FundoftheUniversityofTorontoandLuigiZingalestheCenterforResearchonSecurityPrices, theStiglerCenter,andtheInitiativeonGlobalFinancialMarketsattheUniversityofChicagofor Þnancialsupport.WewouldliketothankAlexanderPhung,DenrickBayot,andVictorXinfortruly outstandingresearchassistantship.WethankJohnDonohue,JayHartzell,JonathanKarpoff, AndrewMetrick,ShivaRajgopal,AdrianoRampini,twoanonymousreferees,Editor,Campbell Harvey,andseminarparticipantsatHarvardBusinessSchool,HarvardLawSchool,Michigan LawSchool,theUniversityofPennsylvania,theDuke-UNCCorporateFinanceConference,the NBERSummerInstitute,theUniversityofTexasConferenceonEmpiricalLegalStudies,andthe AmericanFinanceAssociationMeetings(2007)forhelpfulcomments.WethankNittaiBergman forsharinghisdataonemployeesÕstockoptions. 2213
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