Dealing with Ethical Dilemmas: A Look at Financial Reporting by Firms Facing Product Harm Crises

Shafu ZHANG; Like JIANG; Michel MAGNAN; Lixin Nancy SU

doi:10.1007/s10551-019-04375-6

Dealing with Ethical Dilemmas: A Look at Financial Reporting by Firms Facing Product Harm Crises

Shafu ZHANG, Like JIANG^*, Michel MAGNAN, Lixin Nancy SU

^*Corresponding author for this work

Lingnan University

Research output: Journal Publications › Journal Article (refereed) › peer-review

11 Citations (Scopus)

Abstract

A product harm crisis (PHC) undermines a firm’s reputation as well as its managers’ career outlook. To shake off the stigmatization resulting from the PHC and regain a firm’s legitimacy among stakeholders, managers usually face an ethical dilemma as they choose to be transparent about the crisis’ financial implications or to obfuscate them to neutralize the negative impact of the PHC. We find evidence that managers engage in income-increasing earnings management when their firms experience PHCs. Moreover, while income-increasing earnings management in PHCs reduces the likelihood of customer loss and CEO forced turnover in the short run, such behavior can be deemed opportunistic and unethical as it carries long-run negative consequences in terms of a higher likelihood of accounting restatement and weaker future operating performance. Finally, managers in firms that are subject to stricter external monitoring and managers in firms with proactive ethical policies are less likely to engage in upward earnings management in PHCs.

Original language	English
Pages (from-to)	497-518
Number of pages	22
Journal	Journal of Business Ethics
Volume	170
Issue number	3
Early online date	23 Dec 2019
DOIs	https://doi.org/10.1007/s10551-019-04375-6
Publication status	Published - May 2021

Bibliographical note

Funding Information:
We thank Sophie Andousset-Coulier, Daniel Bens, Robert Bushman, Qiang Chen, Agnes Cheng, Ilia Dichev, Claude Francoeur, Simon Fung, Stephen Hillegeist, David Larcker, Vic Naiker, Jeffrey Ng, Valeri Nikolaev, Gordon Richardson, Douglas Skinner, Jennifer Wu Tucker, Yachang Zeng for their helpful suggestions. We also thank seminar participants at The Hong Kong Polytechnic University, Monash University, Concordia University, Université de Rennes I, and Deakin University as well as participants at the 2017 European Accounting Association and the 2017 Canadian Academic Accounting Association conferences for their comments. Like Jiang acknowledges financial support from the Faculty of Business and Economics of the University of Melbourne. Michel Magnan acknowledges financial support from Concordia University, the S.A. Jarislowsky Chair in Corporate Governance (Concordia University), and the Institute for Governance of Private and Public Organizations. Shafu Zhang acknowledges financial support from Nanjing University.

Publisher Copyright:
© 2019, Springer Nature B.V.

Keywords

Earnings management
Ethical financial reporting
Firm reputation
Product harm crisis

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10.1007/s10551-019-04375-6

http://link.springer.com/10.1007/s10551-019-04375-6

Cite this

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title = "Dealing with Ethical Dilemmas: A Look at Financial Reporting by Firms Facing Product Harm Crises",

abstract = "A product harm crisis (PHC) undermines a firm{\textquoteright}s reputation as well as its managers{\textquoteright} career outlook. To shake off the stigmatization resulting from the PHC and regain a firm{\textquoteright}s legitimacy among stakeholders, managers usually face an ethical dilemma as they choose to be transparent about the crisis{\textquoteright} financial implications or to obfuscate them to neutralize the negative impact of the PHC. We find evidence that managers engage in income-increasing earnings management when their firms experience PHCs. Moreover, while income-increasing earnings management in PHCs reduces the likelihood of customer loss and CEO forced turnover in the short run, such behavior can be deemed opportunistic and unethical as it carries long-run negative consequences in terms of a higher likelihood of accounting restatement and weaker future operating performance. Finally, managers in firms that are subject to stricter external monitoring and managers in firms with proactive ethical policies are less likely to engage in upward earnings management in PHCs.",

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Dealing with Ethical Dilemmas: A Look at Financial Reporting by Firms Facing Product Harm Crises

Abstract

Bibliographical note

Keywords

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