Rebuilding a shattered reputation: Discretionary accruals and donations following corporate controversies

Abstract

We examine the consequences of controversies on corporate reputation and identify two reputation-building strategies that companies are adopting to restore their trust relationships with stakeholders in the aftermath of media condemnation. In particular, we find that in the post-controversy period firms take a bolstering strategy of reducing their discretionary accruals and endeavour to engage more actively in philanthropic activities. In terms of regaining reputation, as measured by the increase in the Britain’s Most Admired Companies ranking, reducing reporting aggressiveness is marginally efficacious while charitable giving appears ineffectual. Overall, our findings indicate that a tarnished reputation may be difficult to rebuild.

Keywords: Controversies; Corporate Reputation; Donations; Reporting Aggressiveness

JEL Classification: D22; D64; G32; G41