A new Penn State University study finds the announcement of one public firm’s misconduct can have negative consequences for other public companies in the same industry, in the form of decreased investor confidence.
Srikanth Paruchuri and Vilmos Misangyi, associate professors of management and organization at PSU’s Smeal College of Business, studied accounting irregularities that resulted in financial restatements, in which the company in question had to revise and publish one or more previous financial statement. The pair focused on a sample of 725 Standard & Poor 1500 firms, covering 219 industries. They analyzed 84 financial restatement events that took place in 2004, as captured in the U.S. General Accountability Office’s Financial Restatement Database.
When one firm announces that wrongdoing has occurred within its organization, Paruchuri and Misangyi found “a generalization of culpability ensues,” to an extent that investors fear others within the industry “are also likely to have engaged in similar misconduct,” they wrote in the study, which is slated to appear in the Academy of Management Journal.
And, the more recognizable the company doing the dirty deeds, the worse the fallout, it seems.
“In other words,” the study authors wrote, “bystander firms are more negatively valued based on another firm’s misconduct if the offending firm is larger, and therefore more familiar to the investor.”
In the context of how investors perceive financial transgressions, “investors will see those perpetrator firms with which they are familiar as being representative of the industry as a whole, and this familiarity therefore makes the culpability of the perpetrator more potent for generalization,” according to the researchers.
These findings come just a few months after we reported on the release of an Ethics Resource Center study indicating corporate misconduct is on the decline. In a poll of 6,400 U.S. employees, the Arlington, Va.-based ERC found 41 percent of respondents saying they observed misconduct in 2013; a 14 percent dip from 2007.
So, that’s encouraging. But, as this new PSU study demonstrates, the implications of bad corporate behavior are far-reaching, extending well beyond your organization’s walls. Taken together, these studies seem to also offer another reminder of HR’s responsibility to conduct solid ethics training, promote a principled corporate culture, and, hopefully, keep the organization from becoming that one bad apple.