Understanding Reputation Damage to Firm Culture: Insights from Employee Perceptions Post Financial Misconduct

Abstract

We investigate changes in employee perceptions of their firm and managers following the revelation of financial misconduct using employee ratings and comments on Glassdoor.com. We find that employee overall ratings of their company decline by 0.23 standard deviation, and ratings of culture, senior leadership, career opportunity, work-life balance, and employee recommendations also decline, ranging from 0.09 to 0.28 standard deviation. Ratings decline are more pronounced for employees with longer tenure, middle-aged, and full-time status, and for announcements receiving high media attention. Using a machine learning method to analyze employee comments, we find that employees provide fewer positive comments and more negative ones on the topic of firm culture. Employees also mention their intention to leave more frequently in their negative comments and general feedback comments. Collectively, the evidence suggests more negative employee perceptions about their firm following financial misconduct announcements, consistent with reputation damage to the firm culture. These negative sentiments suggest higher labor retention costs and lower productivity after a financial misconduct incident.

Keywords: Corporate Culture, Employee Satisfaction, Financial Misconduct, Reputation Damage

JEL Classification: G3, M4