Situational and organizational influences on transparency following financial restatements

Abstract

This study explores the influence of situational and organizational factors on transparency regarding financial restatements. It is predicted that situational factors related to the severity of a restatement will influence transparency about the event and that an organization’s stakeholder orientation will moderate the relationship between the magnitude of the restatement and transparency. Consistent with predictions, results show a generally positive relationship between the severity of the restatement and transparency in the restatement announcement but also show that firm characteristics such as size, profitability, and stakeholder orientation can alter this relationship. Although transparency following restatements is generally viewed as desirable, we find that among smaller firms transparency is negatively related to the severity of the restatement, and we theorize that this is due to risk aversion triggered by fears that the firm may fail as a result of the restatement. We also find that companies with an individualistic identity orientation alter their transparency following a restatement depending on the severity of the restatement whereas firms which derive organizational identity from relationships with stakeholders or broader groups display a more consistent level of transparency across restatements of varying severity. Taken together, the results of this study provide increased understanding of factors which influence transparency following restatements and suggest that increased attention should be given to the role of organizational characteristics in shaping responses to such events.

Keywords:

• transparency
• stakeholder orientation
• organizational identity orientation
• financial restatements
• corporate communications
• corporate social performance

PUBLIC INTEREST STATEMENT

Businesses frequently face events which lead to public concern and scrutiny and place managers in the difficult position of deciding how communicate with their constituents in order to ease stakeholders’ concerns and protect their business. There is increasing public advocacy for improved corporate transparency in the wake of negative events and scandals and some research indicates that transparency can sometimes reduce the fallout following a negative event. Nonetheless, there is also evidence that managers are often reluctant to be fully transparent about negative events and that in some cases this reluctance is justified. This research article explores how characteristics of a company and of the event it’s facing can influence the transparency of disclosures managers make regarding negative events. This study of transparency in announcements of financial restatements finds that characteristics of the event and the organization can influence transparency following a negative event.

Notes

1. All coefficients reported are unstandardized.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

A. J. Guerber

A. J. Guerber received a Ph.D in Business Administration – Management from the University of Arkansas. Her research interests include organizational ethics, corporate communications, and stakeholder management. A.J. teaches Business Ethics and Strategy at the undergraduate and graduate levels at West Texas A & M University in 2016 and has served as an organizer of the Sustainability, Ethics & Entrepreneurship (SEE) conference since 2012. She has published research in the Journal of Managerial Issues and Crime and Corruption in Organizations.

Vikas Anand

Vikas Anand earned a Ph.D. from Arizona State University, an MBA in International Business from the Indian Institute of Foreign Trade, and a Bachelor’s in Engineering and Master’s in Physics from Birla Institute of Technology. His research explores organizational corruption, organizational identity, and knowledge and information management. He has published in several outlets such as the Academy of Management Review, Research in Organizational Behavior, Organization Science, and Academy of Management Executive.