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.
Department
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