Reputation Repair After a Serious Restatement

TLDR

Firms aim to target multiple stakeholders—capital providers, customers, employees, and local communities—to repair reputation, with such actions expected to yield positive market returns. This study investigates how firms repair reputations after a serious accounting restatement by reviewing press releases and cataloguing 1,765 reputation‑building actions. The authors reviewed firms’ press releases, identifying reputation‑building actions for 94 restating firms before and after their restatement and for matched control firms during the same periods. Restating firms increased both the frequency of reputation actions and the associated stock returns after restatement compared to controls; firm characteristics predicted stakeholder targeting, and actions aimed at both capital providers and other stakeholders improved financial reporting credibility. Data used in the study are available from the sources indicated.

Abstract

ABSTRACT: How do firms repair their reputations after a serious accounting restatement? To answer this question, we review firms' press releases and identify 1,765 reputation-building actions taken by: (1) 94 restating firms in the periods before and after their restatement; and (2) a set of matched control firms during contemporaneous periods. We posit that firms have incentives to target multiple stakeholders in a reputation repair strategy—including capital providers, customers, employees, and geographic communities—and that actions targeting each group generate positive market returns as reputation capital is repaired. Consistent with our predictions, the frequency of, and stock returns to, reputation-building actions are greater for restating firms in the period after their restatement than for the control groups. In addition, firm characteristics predict the types of stakeholders targeted by firms. Finally, actions targeted at both capital providers and other stakeholders are associated with improvements in the restating firm's financial reporting credibility. Data Availability: The data used in this study are available from the sources indicated.