Not Seeing Eye to Eye: Differences in Shareholders' and Prospective Investors' Reactions to Adverse Event Disclosure

• In Event: Investor Reactions to Management Disclosures

Abstract

This study investigates the effect of adverse event disclosure on shareholders’ versus prospective investors’ judgments of management credibility, contingent on the locus of attribution employed by management in their communication about the event. Relying on Social Identity theory and prior empirical findings, we presume that shareholders identify with the company they are invested in. We find that identified shareholders and non-identified prospective investors indeed make different judgments about managerial credibility when managers employ external attribution. Prospective investors view such attributions as deceptive, and hence judge the explanation given by management to be much less believable than shareholders do. Thus, we find that company identification has a strong positive effect on credibility given external attribution, while we find no significantly different effect under internal attribution. We also provide evidence that this difference in credibility leads to different valuation judgments. Thus, we show that adverse event disclosure can induce disagreement among market participants. We discuss important practical implications of our findings. One such implication is that, arguably counterintuitively, managers should shy away from employing external attributions, but rather admit to their own inadequacies in terms of their (in)actions, especially when aiming their communications about adverse events at prospective investors.

Authors

• Erik Peek, Rotterdam School of Management

• Marcel Van Rinsum, RSM Erasmus University

• Sebastian Stirnkorb, Rotterdam School of Management, Erasmus University