How large should the reward be for corporate whistleblowers? This question was explored in novel research by HKUST’s Chao Tang and colleagues. Their study shows that while larger bounties do not increase the value of whistleblowing information, they do make the absence of whistleblowing a more informative signal for regulators.

Some firms exaggerate their value to mislead investors. To detect such practices, market regulators offer bounties to insiders for tipping them off about fraud. However, these monetary rewards are controversial. “The debate about whether the regulator should increase or restrict whistleblowing bounties is still ongoing,” the researchers note. “Arguments for restricting whistleblowing bounties are usually centered around the concern that an excessive bounty may attract tremendous frivolous and self-proclaimed whistleblowing.”

In this context, the authors set out to investigate the effect of bounty size on whistleblowers’ and regulators’ behavior. They developed a novel stylized model in which a self-proclaimed good firm seeks investment from investors.

Their findings show that as the bounty increases, the value of whistleblowers’ information decreases. Increasing the reward induces whistleblowers with less useful information to come forward as well, thereby making a whistleblowing tip less informative about the fraud.

By the same token, raising the bounty increases the information value of “no whistleblowing.” This is because no whistleblowing indicates there is likely no fraud, which reduces the regulator’s resources. The informational value of no whistleblowing is a novel finding that the authors demonstrate to be “a key determinant of the optimal whistleblowing program.”

This innovative study will inform policymakers on the optimal strategy for catching corporate fraudsters. For example, the authors say, “regulators may consider adjusting the whistleblowing bounty to encourage more whistleblowing in firms that are more prone to fraud or during economic booms.”