Investor reactions to apologies for financial misconduct

Abstract

We conduct three experiments to examine the implications of corporate apologies on investors' reactions to allegations of financial misconduct. In Experiment 1, we manipulate whether the firm apologizes or denies the misconduct. Additionally, we manipulate how the firm apologizes for (denies) the misconduct by comparing “basic” response strategies (i.e., responses containing nothing more than a simple apology or denial) with “full” response strategies (i.e., responses containing additional elements, such as explicitly naming the misconduct). We find that investors are less willing to invest when the firm apologizes than denies it. Using mediation analysis, we find that when investors observe an apology, they attribute more responsibility to the management for the events, leading to a lower perception of credibility and a higher perception of litigation risk, ultimately affecting their investment judgment. Our results do not provide evidence that more extensive responses affect investors differently than more basic apologies or denials. In Experiment 2, we investigate self-disclosure as a potential strategy for firms to mute investors' negative reactions to apologies. Our results replicate the findings of Experiment 1. However, we do not find evidence that management can attenuate the adverse effects of apologizing for misconduct by self-disclosing the misconduct. In Experiment 3, we separate whether the apology includes an acceptance of responsibility or not and whether there is subsequent evidence of guilt or evidence of innocence. Surprisingly, investors do not react more favorably to apologies (with or without acceptance of responsibility) than denials, even when evidence substantiates the allegations. Overall, our study demonstrates that it is difficult for managers to attenuate the negative effects of financial misconduct on investors’ perceptions with apologies.