The Value of Confession: Admitting Mistakes to Build Reputation

47 Pages Posted: 21 Jul 2011 Last revised: 8 Nov 2017

See all articles by Carlos Corona

Carlos Corona

Carnegie Mellon University

Ramandeep S. Randhawa

University of Southern California

Date Written: July 11, 2017

Abstract

Often firms reveal oversights and bad decisions publicly through their financial reporting (for instance, restating earnings, impairing goodwill, etc.). These "confessions," which usually lead to immediate reputation losses, may be attributed to attempts to be perceived as transparent or to attempts to avoid likely litigation costs. In this paper, however, we argue that reputational concerns about perceived ability alone can provide firms with strong enough incentives to confess their mistakes, even in the absence of other non-reputational disciplinary mechanisms. Analyzing the repeated interaction between a firm and an external evaluator who may detect the firm's mistakes, we show that in equilibrium a confession places the firm under higher future scrutiny, which is more costly for lower quality firms. Consequently, in equilibrium, higher quality firms confess mistakes more often.

Keywords: reputation, restatement, recall, mistake, confession, admit, bad news, disclosure, inspector, inspection, verification

Suggested Citation

Corona, Carlos and Randhawa, Ramandeep S., The Value of Confession: Admitting Mistakes to Build Reputation (July 11, 2017). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1702444 or http://dx.doi.org/10.2139/ssrn.1702444

Carlos Corona (Contact Author)

Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Ramandeep S. Randhawa

University of Southern California ( email )

Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States

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