Whistleblowers play an obvious role in uncovering immoral and/or criminal acts.  Research from the Max Planck Institute also reveals, however, that they can play a crucial role in deterring such acts in the first place.

Whistleblowers are typically viewed as a positive force in helping us to uncover crooked behavior.  This view is grounded on the fact that whistleblowing results in prosecutions but also that it helps to promote honest behavior itself.

The researchers examined the world of cross-border wealth management in Switzerland, which is the world’s biggest market for such activity.  They explored how the stock market reacted when 13 data leaks involving offshore tax evasion at Swiss banks were made public.

Active deterrent

The analysis found that the share price of the banks caught up in the various scandals seemed to behave inconspicuously in the ten trading days leading up to the data leak.  In the first couple of days after the leak, however, they fell by around 1.1% compared to the wider market, with a further 2.2% fall in the four days after that.

Standard theory on efficient financial markets would posit that prices would react to the available information, so in this instance, traders clearly believed that future profits at the banks involved would be lower.

Because the Liechtenstein affair was the first such data leak made in public, the researchers argue that the tax evaders hadn’t really taken the risk into account.  This hypothesis is supported by further analyses by the researchers, which found that Swiss banks with no links to the scandal suffered no fall in their share price.

The researchers found that when subsequent unethical behaviors were uncovered, such as the Panama Papers in 2016, there were no more significant changes to the share prices of the banks involved.  This suggests that after the initial Liechtenstein leak, the banks engaged in such practices had adjusted their expectations and factored in the fact that their criminal activities were likely to be discovered.

Lastly, the researchers draw on data from the Bank for International Settlements, which revealed a fall in international bank deposits in tax havens of around 10% after the data leak compared to deposits in non-tax haven countries.  This clearly suggests that the whistleblowing activity was acting in ways that go beyond the financial markets and had real consequences on the behavior of tax fraudsters and their accomplices.