Online Appendix for. Whistleblowers and Outcomes of Financial Misrepresentation Enforcement Actions

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1 Online Appendix for Whistleblowers and Outcomes of Financial Misrepresentation Enforcement Actions Andrew C. Call Arizona State University Gerald S. Martin American University Nathan Y. Sharp Texas A&M University Jaron H. Wilde University of Iowa

2 Online Appendix Summary of the Tables Table A1: Description of Whistleblowing and Enforcement Action Samples (Full Sample, not limited to Post-SOX) Panel A: Source of Whistleblower Action (Full Sample) Panel B: Whistleblower Actions by Respondent Type (Full Sample) Panel C: Whistleblower Actions by Fama and French 12 Industry Classification Table A2: Enforcement Outcomes for Financial Misrepresentation Pre- and Post-SOX Table A3: Variance Inflation Factors (VIFs) for the Primary Model Specification Table A4: Enforcement Outcomes with More Parsimonious Model

3 Table A1. Description of Whistleblowing and Enforcement Action Samples The 1,133 enforcement actions represents the universe of all regulatory enforcement actions initiated for financial misrepresentation from 1978 through 2012 under Section 13(b) and rules promulgated thereunder of the Securities and Exchange Commission Act of 1934, as amended by the Foreign Corrupt Practices Act of Panel A summarizes the type of whistleblower actions by source. OSHA refers to the Occupational Safety and Health Administration and FOIA and Non-FOIA refer to the OSHA whistleblower actions received through a Freedom of Information Act filing and those directly referred to in administrative and legal proceedings as part of the enforcement action. Panel B presents the enforcement actions partitioned pre and post Sarbanes-Oxley Act and by whistleblower involvement by type of respondent named and the position or relation to the firm. Panel C presents the frequency counts and percentages of firms listed in Compustat over the relevant period, the number of OSHA whistleblower complaints received through the Freedom of Information Act filing and enforcement actions by industry using the Fama and French 12-industry classification. Panel A. Source of Whistleblower Action (Full Sample) Type N % OSHA FOIA whistleblower complaints received 934 Total enforcement actions 1, No whistleblower Whistleblower OSHA FOIA Qui tam As noted in enforcement proceedings Panel B. Whistleblower Actions by Respondent Type % Whistleblower Category N Actions No Yes % Total enforcement actions 1, Pre Sarbanes-Oxley Act Post Sarbanes-Oxley Act Respondent type Executive CEO Other C-level executive Non-executive employee Firm Firm only

4 Table A1. Description of Whistleblowing and Enforcement Action Samples (continued) Panel C. Whistleblower Actions by Fama and French 12 Industry Classification Industry Compustat Firms Enforcement Actions Whistleblower Complaints All With Whistleblower N % % % % N N Firms Firms Actions Actions % Complaints Consumer Non-Durables: food, tobacco, textiles, apparel, leather, toys 1, Consumer Durables: cars, TV's, furniture, household appliances Manufacturing: machinery, trucks, planes, office furniture, paper, commercial printing 2, Oil, Gas, & Coal Extraction & Products 1, Chemicals & Allied Products Business Equipment: computers, software & electronic equip 4, Telephone and Television Trans Utilities Wholesale, Retail & Some Services (Laundries, Repair Shops) 2, Healthcare, Medical Equip & Drugs 2, Finance 4, Other: mines, construction, building maintenance, trans, hotels, business services, entertainment 3, Total 25, ,

5 Table A2. Enforcement Outcomes for Financial Misrepresentation Pre- and Post-SOX This table presents exponential regression results examining the association between employee whistleblowing allegations and enforcement outcomes. The 1,133 enforcement actions represent the universe of all regulatory enforcement actions initiated for financial misrepresentation from 1978 through 2012 under Section 13(b) and rules promulgated thereunder of the Securities and Exchange Commission Act of 1934, as amended by the Foreign Corrupt Practices Act of We present coefficient estimates on top and associated z-statistics below using robust standard errors. All variables are defined in Appendix A. The dependent variables are total firm penalties in millions of dollars, total employee penalties in millions of dollars, and total employee prison sentences in months. ***, ** and * represent significance at 0.01, 0.05, and 0.10 respectively. (1) (2) (3) Firm Penalties Employee Penalties Prison Sentences Coefficient (z-stat) Coefficient (z-stat) Coefficient (z-stat) Whistleblower 0.995* (1.665) 1.384*** (2.846) 0.994*** (3.072) Self-dealing * (-1.821) (1.541) 0.706*** (3.301) % Blockholder ownership (-1.192) 2.511** (2.140) (0.354) % Initial abnormal return (0.930) (-0.354) * (-1.883) Violation period 0.738*** (3.661) 1.488*** (4.512) 0.371** (2.418) Bribery (1.010) (-1.049) (0.173) Organized crime *** (-2.890) ** (-2.136) (0.265) Deterrence (-0.179) 1.642* (1.771) (-0.846) # C-level respondents (1.338) 2.208*** (3.526) 0.817*** (3.257) # Code violations 1.422*** (2.967) (1.025) 1.868*** (6.285) Fraud * (-1.749) (-0.780) (0.127) Misled auditor (1.448) 1.677** (2.281) (-0.338) Big N auditor 2.939** (1.986) (-0.237) (0.429) Exec respondent terminated (-0.391) (0.592) (0.637) Cooperation (1.593) (-0.082) (-0.877) Impeded investigation (0.030) (-1.024) (-1.060) % Independent directors (-0.825) (-0.912) (-1.223) Recidivist (-0.333) (-1.054) (0.576) Market capitalization 0.261*** (2.742) (1.509) (0.992) Market-to-book assets ** (-2.202) (-0.815) (0.781) Leverage ratio 0.579*** (3.058) 0.397*** (2.712) * (-1.854) Distance from regulator (-1.357) (-1.437) (-0.912) Post-Sarbanes Oxley (0.028) (-0.676) (-0.504) Intercept *** (-4.449) *** (-7.754) *** (-4.547) Observations 1,133 1,133 1,133 Χ (p-value) (0.000) (0.000) (0.000) Pseudo R-squared

6 Table A3. Variance Inflation Factors (VIFs) for the Primary Model Specification Variable Variance Inflation Factor (VIF) Whistleblower 1.32 Self-dealing 1.26 % Blockholder ownership 1.38 % Initial abnormal return 1.18 Violation period 1.28 Bribery 2.37 Organized crime 1.22 Deterrence 1.59 # C-level respondents 2.56 # Code violations 3.02 Fraud 2.95 Misled auditor 1.66 Big N auditor 1.92 Exec respondent terminated 1.84 Cooperation 1.41 Impeded investigation 1.10 % Independent directors 1.83 Recidivist 1.20 Market capitalization 2.66 Market-to-book ratio 1.29 Leverage ratio 1.27 Distance from regulator 1.11 FF12 Industry Fixed Effects Mean VIF 1.93

7 Table A4. Enforcement Outcomes with More Parsimonious Model This table presents exponential regression results examining the association between employee whistleblowing allegations and enforcement outcomes only including control variables that are significant (p < 0.10) in one or more of the primary models and industry fixed effects. The 658 enforcement actions represent the universe of all regulatory enforcement actions initiated for financial misrepresentation under Section 13(b) and rules promulgated thereunder of the Securities and Exchange Commission Act of 1934, as amended by the Foreign Corrupt Practices Act of 1977, where any part of the violation or regulatory proceedings extended past the enactment of the Sarbanes- Oxley Act on July 30, We present coefficient estimates (left) and associated test statistics (right) using robust standard errors. All variables are defined in Appendix A. The dependent variables are total firm penalties in millions of dollars, total employee penalties in millions of dollars, and total employee prison sentences in months. ***, ** and * represent significance at 0.01, 0.05, and 0.10 respectively. (1) (2) (3) Firm Penalties Employee Penalties Prison Sentences Coefficient (z-stat) Coefficient (z-stat) Coefficient (z-stat) Whistleblower flag 1.572*** (2.779) 1.037** (2.483) 0.522** (1.997) Self-dealing (-1.465) 1.881*** (2.958) 1.040*** (4.220) % Blockholder ownership (-0.936) 1.938*** (2.721) (0.502) % Initial abnormal return 2.295* (1.793) (-1.482) *** (-2.774) Violation period 0.568** (2.113) 2.024*** (5.612) 0.570*** (2.919) Bribery 1.314*** (3.944) (-0.634) (0.687) Organized crime *** ( ) (-0.156) (0.652) Deterrence (0.077) 1.078* (1.672) * (-1.906) # C-level respondents 0.606* (1.676) 1.992*** (3.314) 1.205*** (4.938) # Code violations 1.786*** (3.513) 1.787** (2.545) 1.938*** (5.242) Big N auditor 2.853*** (3.779) *** (-2.594) (1.606) Cooperation (1.507) (0.882) (-0.564) Recidivist (-0.204) *** (-3.237) (0.837) Market capitalization (0.771) (0.913) (-0.756) Intercept *** (-5.534) *** (-6.553) *** (-7.239) Observations Χ (p-value) (0.000) (0.000) (0.000) Pseudo R-squared

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