“Reputation with Non-Equity Stakeholders and the Equity Market Reaction to Accounting Restatements” by Mr. Nafis RAHMAN
Mr. Nafis RAHMAN
Ph.D. Candidate in Accounting
Sauder School of Business
The University of British Columbia
I examine how signals of reputation with non-equity stakeholders affect the market reaction to accounting restatements. Using Corporate Social Responsibility (CSR) rating as a proxy for reputation with non-equity stakeholders, I find significantly less negative market reaction to restatements for firms with better reputation. CSR’s ability to assuage investor concerns in the event of a restatement is greater for material restatements, which are likely to generate greater uncertainty about the restating firms’ credentials as reliable business partners. On average, a one standard deviation increase in CSR can mitigate 18.2% of the share value loss triggered by restatements. Post-restatement consequence analysis corroborates the results from the market reaction test. Following restatements, high-CSR firms experience smaller earnings-decreases and need to engage in fewer reputation restoration activities. My results suggest that a significant portion of the market value loss triggered by restatements reflects an expectation that the restating firms will face a ‘worsening of terms’ in their future transactions with the non-equity stakeholders, and CSR reputation can dampen this effect.