Academic Conference on Good Business

Reputation Repair After a Restatement

How can reputations be repaired after a financial reporting scandal such as an accounting restatement? We read 23,078 press releases and identify 1,219 reputation-building actions taken by 94 restating firms to answer this question. 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 which target each of these groups will generate positive market returns. Consistent with our predictions we observe significant increases in the frequency of, and abnormal stock returns to, reputation-building actions targeted at these stakeholders in the year after the restatement relative to a control period. Further, we demonstrate that reputation-building actions directed towards customers, employees, and communities complement actions directed towards capital providers, and that firm characteristics predict the specific types of stakeholders that managers choose to target. Finally, we show that actions targeted at both capital providers and other stakeholders are associated with improvements in the restating firm’s financial reporting credibility.