Do Employees Waive Financial Red Flags through the Glassdoor?

We use Glassdoor employee rating measures to examine the relationship between employee perceptions about their employer and the employer’s level of financial distress, proxied by Bloomberg’s one-year default probability. Our results indicate that improvements (deterioration) in Glassdoor ratings reveal a decrease (increase) in the average firm’s level of financial distress. We also find that the relation between a firm’s level of financial distress and Glassdoor ratings is not uniform across all firms: the relation is stronger for small and mid-capitalization firms. By establishing a relationship between Glassdoor ratings and the level of financial distress, our study adds to the forensic accounting literature and shows that Glassdoor ratings can help auditors, regulators, investors, and market participants predict future concerns relating to financial distress. Our results suggest that employee perceptions provide an early warning for financial red flags, as the pressures from financial distress increase the risk of fraudulent behaviors. Data Availability: On request. JEL Classifications: G33; G41; M14; M41.