Curbing Corporate Fraud From Within: A Perspective From Rank-and-File Employees

Abstract

This study examines the impact of rank-and-file employees on corporate fraud. Using the educational levels of employees as a proxy for employee quality, we demonstrate that higher-quality employees serve as notable deterrents to corporate fraud. This effect operates through two underlying mechanisms: earnings pressure alleviation and monitoring role enhancement. Our findings survive after addressing potential endogeneity concerns. Heterogeneity analysis further reveals that the inhibitory effect of employee quality is more pronounced in firms facing severer financing constraints, weaker CEO power, greater reliance on employees, lower unemployment concerns, and better corporate governance. Lastly, we find that internal employee monitoring substitutes for external mechanisms, while employee stock ownership plans enhance the monitoring effectiveness of employees.