Description

Prior studies find dishonest top executives are associated with lower quality financial reporting. We focus on the role of rank-and-file employees in shaping financial data quality in that these employees are the sources of internal information transfer. Using a novel dataset that contains information on registrants using the Ashley Madison website to find extra-marital affair partners, we construct a firm-level employee integrity measure and assess the association between employee integrity and firm’s information quality. We find that low integrity of rank-and-file employees is associated with lower earnings quality and less accurate management forecasts, and we mitigate the potential endogeneity problem by estimating 2SLS regressions with instrument variables exogenous to firms’ information quality choices. Further analyses show that the negative relation between employee integrity and information quality is attenuated by higher managerial ability, and is robust to alternative employee integrity measures.

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Aug 10th, 12:00 AM

Employee Integrity and Corporate External Information Quality

Prior studies find dishonest top executives are associated with lower quality financial reporting. We focus on the role of rank-and-file employees in shaping financial data quality in that these employees are the sources of internal information transfer. Using a novel dataset that contains information on registrants using the Ashley Madison website to find extra-marital affair partners, we construct a firm-level employee integrity measure and assess the association between employee integrity and firm’s information quality. We find that low integrity of rank-and-file employees is associated with lower earnings quality and less accurate management forecasts, and we mitigate the potential endogeneity problem by estimating 2SLS regressions with instrument variables exogenous to firms’ information quality choices. Further analyses show that the negative relation between employee integrity and information quality is attenuated by higher managerial ability, and is robust to alternative employee integrity measures.