THE ANTECEDENTS, CONSEQUENCES, AND REMEDIES OF CORPORATE FINANCIAL WRONGDOINGS

Nari Kim

Despite considerable attentions from management literature on corporate behavior, few have examined dark side of corporate activities. Departing from this research gap, the current study explored a firm’s financial misconduct as the main research phenomena and examined (1) factors that lead CEOs be engaged in more severe financial fraud, (2) consequences after corporate financial fraud, and (3) corporate efforts to recover damaged reputation due to their financial misconduct. To address the research question regarding the antecedents of financial misconduct, we examine how a CEO’s decision horizon guides his/her opportunistic behavior. Specifically, we found that a CEO in the pre-departure period is more motivated to engage in more severe financial fraud. We also found that different governance mechanisms (e.g. CEO duality, compensation structure, auditor monitoring, and legal regulation) amplify or mitigate a CEO’s aggressiveness in financial fraud. The current study also examined the consequences following corporate financial misconduct. By extending the argument in signaling theory, we suggest that a firm’s financial restatement experience devaluates its overall value in its acquisition transaction. Specifically, we found that investors negatively react to a firm’s acquisition announcement if a firm has financial restatement experience. We also found that acquirers pay low premiums to the target firm that has such experience. We further found that the third party (e.g., investment bank) plays a role in this signaling mechanism. The investors and acquirers react to the signal of using investment banks in different ways. Our results suggest that value-destroying signal strongly influences market outcomes, and that the interpretations of the signal are different across different receivers. Finally, by applying psychological perspectives to corporate level phenomenon, we explored corporate impression management activities after their financial misconduct. We hypothesized that the firms will increase public communication after their misconduct to repair damaged reputation and found that more frequent press releases from firms with financial misconduct. We also found variations of impression management activities among firms with financial misconduct, such that their financial performance, social performance, and media reaction influence on the level of corporate repairing strategy.

THE ANTECEDENTS, CONSEQUENCES, AND REMEDIES OF CORPORATE FINANCIAL WRONGDOINGS

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