How Do Investors Respond to Restatements? Repairing Trust Through Managerial Reputation and the Announcement of Corrective Actions

Anna M. Cianci (), Shana M. Clor-Proell () and Steven E. Kaplan ()
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Anna M. Cianci: Wake Forest University
Shana M. Clor-Proell: Texas Christian University
Steven E. Kaplan: Arizona State University

Journal of Business Ethics, 2019, vol. 158, issue 2, No 2, 297-312

Abstract: Abstract Following SOX, financial restatements increased dramatically. Prior research suggests that how investors respond to restatements, particularly those involving fraud, may mitigate or exacerbate damage suffered. We extend both accounting and management research by examining the joint effects of pre-restatement managerial reputation and the announcement of managerial corrective actions in response to a restatement on nonprofessional investors’ judgments. We find that pre-restatement managerial reputation and the announcement of managerial corrective actions jointly influence investors’ managerial fraud prevention assessments, which mediate their trust in management. These trust perceptions in turn affect investors’ investment and CEO retention judgments. Our results have implications for firms that are concerned with lessening the negative consequences associated with issuing a restatement.

Keywords: Corrective action; Fraud prevention; Nonprofessional investors; Reputation; Restatement; Trust (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s10551-018-3844-z

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