How Do Investors Respond to Restatements? Repairing Trust Through Managerial Reputation and the Announcement of Corrective Actions
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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.
KeywordsCorrective action Fraud prevention Nonprofessional investors Reputation Restatement Trust
We thank the Center for Leadership and Character at the School of Business at Wake Forest University for its support of this project.
Compliance with Ethical Standards
Conflict of interest
The authors declare that they have no conflict of interest.
All procedures performed in studies involving human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki declaration and its later amendments or comparable ethical standards.
Informed consent was obtained from all individual participants included in the study.
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