Fool Me Once, Fool Me Twice: An Investigation into Investors’ Reactions Towards CSR Companies Following a Restatement in Financial Statements

• In Event: Forensic Accounting

Abstract

We experimentally investigate nonprofessional investor reactions to restatements for high-performing CSR companies. We rely upon the Stereotype Content Model and research on betrayal aversion to predict that investor reactions to restatements will differ based on the level of CSR performance and whether the underlying misstatement is intentional. We find that in cases of a single restatement, CSR performance shields a company from negative investor reactions due to a higher post-restatement assessment of warmth for high-performing CSR companies but only when an underlying misstatement appears to be unintentional. When a company experiences a recurring restatement, high-performing CSR companies continue to benefit from this insurance effect when an underlying misstatement is unintentional. However, when recurring restatement appears to be caused by intentional misstatement, investors revise their assessment of competence downward to the higher degree for high-performing CSR firms than for their average peers, and results of contrast coding suggest that negative investors’ reactions in case of intentional misstatement are stronger for high-performing CSR companies than for average-performing CSR companies. Thus, we document an emerging betrayal sentiment toward high-performing CSR companies in cases of a recurring restatement caused by an intentional misstatement. Our results provide important information regarding the specific psychological mechanisms and the boundary conditions behind the insurance effect of CSR performance that is documented by prior literature.

Authors

• Erik S. Boyle, University of Cincinnati

• Natalia Maksimovna Mintchik, University of Cincinnati

• Rick C Warne, University of Cincinnati