Using Online Video to Announce a Restatement: Influences on Investor Trust and Investment Decisions

Abstract:     
Restatements are economically significant events that damage investor trust in a firm’s financial reporting. We conduct an experiment to investigate how using online video to announce a restatement interacts with the level of responsibility a manager assumes for the restatement to influence investors’ perceptions of management’s trustworthiness and post-restatement investment decisions. We examine the use of online video for restatement disclosure due to video’s recent, explosive growth as a corporate communication tool. Our results reveal that when the CEO’s firm is the only firm restating, participants viewing the restatement announcement online via video make larger investments in the firm and are more confident in the firm’s future ability to meet analysts’ expectations than are participants who view the restatement announcement online via text. However, we do not observe this effect when the CEO’s firm and its industry peers are restating. Our results also reveal that participants’ perceptions of management’s trustworthiness mediate the influences of disclosure venue and assumed responsibility on post-restatement investment decisions. These findings are important given the dramatic increase in the number of restatements over time, the resultant deterioration of investor trust, and the Security and Exchange Commission’s recent emphasis on transitioning from traditional, paper-based to new, Internet-based disclosure venues.

Keywords: trust, investor, investment decision, responsibility, disclosure venue, online video

JEL Classifications: M40, M41, M43

Working Paper Series