Betrayed Employees: The Impact of Financial Fraud on Inventor Productivity

Although stigma theory suggests that blameless employees will suffer from their association with scandal-rife companies, little is known about how they act in the face of potential stigmatization. Potential stigma concerns inventors, an important group of employees whose output can be objectively measured; thus, when a dishonest culture and wrongdoings permeate a firm, inventors change their activities and productivity. Our empirical evidence suggests that inventors' patent counts and forward citations significantly drop when egregious fraud occurs. Such a relation is more pronounced when inventors live in more religious areas, but is mitigated when inventors have more social capital. This relation can be attributed to three mechanisms: the departure of talented inventors, an increased uncertainty in payoffs, and reduced efforts.