Reputation Repair after a Restatement: The Role of Corporate Social Responsibility Disclosure

Abstract

Issuing restatements undermines market value and management reputation. Using an experiment, this study examines whether corporate social responsibility (CSR) disclosure can repair the damaged reputation following a restatement. Two aspects of CSR information are considered—presence of CSR disclosure and source of CSR disclosure. The results show that disclosing positive CSR activities is an effective way to repair management reputation and enhance investment interest. Also, there is an incremental benefit if investors receive CSR information from an independent source. This study contributes to the limited literature on the effectiveness of corrective actions after a restatement by demonstrating that individual investors’ judgments and decisions after a prominent trust-damaging event, i.e., financial restatement, are affected by both the presence and the source of CSR information. This study contributes to the literature by providing direct, experimental evidence in accounting on CSR disclosure as a reputation-restoring mechanism after a restatement.