Dealing with Ethical Dilemmas: A Look at Financial Reporting by Firms Facing Product Harm Crises

Shafu Zhang (), Like Jiang (), Michel Magnan () and Lixin Nancy Su ()
Additional contact information
Shafu Zhang: Nanjing University
Like Jiang: The University of Melbourne
Michel Magnan: Concordia University
Lixin Nancy Su: Lingnan University

Journal of Business Ethics, 2021, vol. 170, issue 3, No 5, 497-518

Abstract: Abstract A product harm crisis (PHC) undermines a firm’s reputation as well as its managers’ career outlook. To shake off the stigmatization resulting from the PHC and regain a firm’s legitimacy among stakeholders, managers usually face an ethical dilemma as they choose to be transparent about the crisis’ financial implications or to obfuscate them to neutralize the negative impact of the PHC. We find evidence that managers engage in income-increasing earnings management when their firms experience PHCs. Moreover, while income-increasing earnings management in PHCs reduces the likelihood of customer loss and CEO forced turnover in the short run, such behavior can be deemed opportunistic and unethical as it carries long-run negative consequences in terms of a higher likelihood of accounting restatement and weaker future operating performance. Finally, managers in firms that are subject to stricter external monitoring and managers in firms with proactive ethical policies are less likely to engage in upward earnings management in PHCs.

Keywords: Product harm crisis; Earnings management; Ethical financial reporting; Firm reputation (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s10551-019-04375-6 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jbuset:v:170:y:2021:i:3:d:10.1007_s10551-019-04375-6

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10551/PS2

DOI: 10.1007/s10551-019-04375-6

Access Statistics for this article

Journal of Business Ethics is currently edited by Michelle Greenwood and R. Edward Freeman

More articles in Journal of Business Ethics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().