Nonlinear Effect of Employee Ownership on Organizational Financial Misdeeds: The Moderating Role of Organizational Size

We used threshold theory to investigate the relationship between employee ownership and financial misdeeds. In particular, we theorized that monitoring and incentive benefits of employee ownership coupled with longer term orientation are two primary theoretical drivers for decreasing the incidence of financial misdeeds in employee-owned firms. Using a sample of 388 investment firms representing 3,421 firm-year observations between 2000 and 2015, we found that employee ownership has an inverted-J-shaped relationship with organizational financial misdeeds such that the negative effect of employee ownership is significant only at medium-to-high levels. We also found that the inverted-J-shaped relationship was stronger when an organization was smaller or practiced giving short-term incentives. We discuss the theoretical and practical implications of these findings.