A study of controversial organizational action: organizational action and audience reaction in the context of financial restatement

Abstract

This dissertation investigates audience responses to organizational action that, while violating audience expectations for consistent and reliable organizational behavior, is ambiguous in terms of its ultimate impact on audiences. The practical situation that I attempt to explain is the reactions to the controversial organizational action of financial restatement by five key audiences of the restating firm (shareholders, institutional investors, securities analysts, the SEC, and customers). A principal argument I develop here is that it is important to consider that audiences react to the controversial action in the context of the organization’s history of action. In this dissertation I look at prior action that is consistent with audience interests, and posit that it is not obvious how such prior action will affect audience interpretations of controversy. I examine two categories of prior action that conforms to audience interests—agency-problem mitigation and corporate social responsibility (CSR) action—and I draw on competing perspectives explaining how such prior organizational action might affect audience responses to the controversial action of financial restatement. On the one hand, such prior organizational action might dampen audience negative reactions to the organization’s financial restatement. Alternatively, such prior organizational action might aggravate audience negative responses to the restatement. I also predict that such prior organizational action will make it more likely that the restating firm will engage in post-restatement actions with the potential to repair damage to positive audience perceptions, specifically CEO change and board member turnover. And, I predict that post-restatement CEO turnover will dampen audience negative reaction to financial restatement. I test my hypotheses using multiple regression models, employing a two-stage process to first control for the probability that a firm will be among those that restated finances, and then to model the reaction of audiences to the restatement announcement. This dissertation contributes to our understanding of: 1) how prior desirable organizational action influences audience interpretations of controversial action; 2) how post-controversy organizational action influences audience continuing interpretations of controversial action; and 3) the presence of a secondary link between firm CSR action and firm outcomes.