Corporate wrongdoing exposure and recovery time: A two-study examination of direct and moderating effects

Corporate wrongdoing has been the subject of organizational research for decades. Even a single instance of corporate wrongdoing can cause a substantial drop in stock price, increase capital costs, decrease shareholder distributions, and significantly damage a firm’s reputation (Chava, Agnes Cheng, Huang, & Lobo, 2010; Coombs, 2007; Elsbach, 1994; Francis, Philbrick, & Schipper, 1994: Pfarrer et al. 2008); these negative outcomes may persist for a long time. Corporate wrongdoing can be viewed as a stigmatizing phenomenon for a firm. Stigmatization theory suggests that corporate wrongdoing discredits the firm, resulting in a reputational stain that makes stakeholders want to disassociate from the firm (Crocker, Major, & Steele, 1998; Devers, Dewett, Mishina, & Belsito, 2009; Marcel & Cowen, 2014). Firms may attempt destigmatizing actions through making changes to the CEO, or destigmatizing language through using specific language to reframe the corporate wrongdoing event. These destigmatizing actions and language shape how investors perceive the firm and thus affect how long the firm takes to recover. The recovery time of firms after corporate wrongdoing as measured by how long the stock price of the firm takes to recoup has not previously been examined in the literature. This is vital to consider since firms can take years to recover (Penuel et al. 2013) and the longer the duration of recovery, the more taxing the wrongdoing is on the firm (Morgeson & DeRue, 2006). Using these two types of mitigating activities, my dissertation presents a two-study analysis of corporate wrongdoing exposure (CWE) and its effect on recovery time. Study I uses generalized equation estimation (GEE) to show that as CWE increases, recovery time increase. It also shows that this relationship can be weakened through the destigmatizing action of CEO turnover. Study II further analysis the relationship between CWE and recovery to show that CEO language can further destigmatize the firm after wrongdoing. However, this varies based on the CEO replacement decision (i.e., no turnover, inside succession, outside succession). Together, these studies show that firms can work to destigmatize after corporate wrongdoing, mitigating the long-term negative effects of stigma (Hampel et al. 2016).