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

Posted: 13 Aug 2019

See all articles by Shafu Zhang

Shafu Zhang

Nanjing University

Like Jiang

University of Melbourne - Faculty of Business and Economics

Michel Magnan

Concordia University - Department of Accountancy

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Date Written: August 10, 2019

Abstract

A product harm crisis (PHC) undermines a firm’s reputation as well as its managers’ career outlook. Managers usually face an ethical dilemma during a PHC as they choose to be transparent about the crisis’ financial implications or to obfuscate them to neutralize the negative impact of the PHC for their self-interests. We find evidence that managers engage in income-increasing earnings management when their firms experience PHCs. Such behavior reduces the likelihood of customer loss and CEO forced turnover in the short run but carries long-run negative consequences in terms of a higher likelihood of accounting restatement and weaker future operating performance. Our evidence suggests that earnings management in a PHC is deceptive and unethical. However, 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.

Keywords: product harm crisis, earnings management, ethical financial reporting, firm reputation

JEL Classification: M14, M41

Suggested Citation

Zhang, Shafu and Jiang, Like and Magnan, Michel and Su, Lixin (Nancy), Dealing with Ethical Dilemmas: A Look at Financial Reporting by Firms Facing Product Harm Crises (August 10, 2019). Available at SSRN: https://ssrn.com/abstract=3435507

Shafu Zhang

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Like Jiang (Contact Author)

University of Melbourne - Faculty of Business and Economics ( email )

Victoria, 3010
Australia

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

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