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Published in: Journal of Business Ethics 1/2022

18-03-2021 | Original Paper

“Just Say You’re Sorry”: Avoidance and Revenge Behavior in Response to Organizations Apologizing for Fraud

Author: Michael J. Wynes

Published in: Journal of Business Ethics | Issue 1/2022

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Abstract

Using two experiments, I examine how apologizing for fraud influences investor's avoidance (selling shares) and revenge (litigation) behavior. Investors in experiment one report how many shares they would sell and how likely they would be to pursue legal punishment after discovering fraud has occurred in an organization they are currently invested in and subsequently reading about management's response to the fraud. I manipulate the nature of fraud as fraudulent financial reporting (misreporting) or asset misappropriation (embezzlement). I also manipulate whether management apologizes, scapegoats responsibility, or remains silent after the fraud. Results show avoidance and revenge behavior is more negative after misreporting fraud. Data suggest that this difference may be partially attributable to the underlying moral norm that is violated. Specifically, misreporting is primarily a moral violation of deception, whereas embezzlement is primarily a moral violation of stealing. Results also show differential investor reactions depending on the type of fraud and management's response. For misreporting, revenge behavior is higher when management apologizes, but there is no effect on avoidance behavior. For embezzlement, avoidance behavior is reduced when the organization apologizes, but revenge behavior is unaffected. In experiment two, I replicate the misreporting condition from experiment one and manipulate apology sincerity. Results show that apology sincerity is positively associated with revenge behavior. Results of these two experiments extend both accounting and trust repair research by emphasizing the importance of disentangling moral integrity-based trust violations and that the adage of "just say you're sorry" is helpful in some situations and harmful in others.
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Footnotes
1
I acknowledge that this is a simplistic view of capital markets. As considered by Healy & Palepu (2001) and others, a more full model notes that investors are not entirely trusting, which is why we have intermediaries such as auditors and regulators. However, introducing these concepts does not take away from the fact that some trust level must be established for investors to give their capital to a manager, and when fraud occurs, this trust is broken.
 
2
One important thing to note is that damages awarded from a lawsuit come directly from the organization's resources. In contrast, the 7.5 times loss in market value is not capital being lost from within the firm, but rather other shareholders’ capital being lost.
 
3
The accidental fire condition resulted in significantly lower responsibility judgments than the misstatement and embezzlement conditions (p < 0.01).
 
4
Several studies have shown that the quality of data gathered through MTurk is comparable to those collected in a more traditional university laboratory setting with the benefit of being more demographically diverse (Brandon, Long, Loraas, Mueller-Phillips, and Vansant, 2014; Buhrmester, Kwang, and Gosling, 2011; Mason and Suri, 2012; Ferrell, Grenier, and Leiby, 2017).
 
5
Points for experience are as follows: 0–6 mths = 1; 6–12 mths = 2; 1–5 yrs = 3; 5 + yrs = 4.
 
6
The average score of those participants that did not pass the screen was 1.46, and 75% had no prior investment experience, while 21% had less than six months' investment experience. My method of ensuring appropriate expertise by participants was approved by my ethics board (IRB equivalent), it was explained in my letter of information, and I received no complaints from any participants.
 
7
I included both time spent and quiz scores as separate covariates in my analyses but did not find any significant time or score effects. Thus, I do not discuss either any further.
 
8
Before conducting any tests, I performed factor analyses on the items from the organizational responsibility scale (Brown and Ki 2013). My factor analyses used a varimax rotation, retaining only factors with an eigenvalue greater than one and items that loaded at 0.70 or higher. For the organizational responsibility scale, two factors appeared in the data. The first is the accountability dimension, consisting of three of the six items designed to capture accountability (eigenvalue = 5.39, = 0.89). The second is the intentionality dimension, consisting of the three items designed to capture intentionality (eigenvalue = 1.43, = 0.88). The three items designed to measure the locality dimension of organizational responsibility did not show any significant loadings.
 
9
Compared to a baseline condition where the $25 million-dollar loss was attributable to a fire at the factory, both types of fraud result in significantly higher responsibility levels (p < 0.01, unreported), consistent with theory and my expectations.
 
10
Given that no information within the materials would indicate the auditors are responsible other than in the scapegoat condition, the level of blame assigned to the auditors by participants in the misreporting condition is surprising. I run a one-way ANOVA with auditor blame as the dependent variable and fraud type as the independent variable. I note that the means for both embezzlement (M = 4.88, SD = 1.54) and misreporting (M = 5.06, SD = 1.48) are significantly higher than the scale midpoint (p < 0.01) but not significantly different from each other (p = 0.29). I interpret these findings as evidence that investors and the general public assume that auditors are responsible for any type of fraud because they believe an auditor's job is to detect fraud, something commonly referred to as the expectation gap (McEnroe and Martens 2001).
 
11
For the analysis in which shares traded is the dependent variable, I include participants' pre-manipulation shares traded as a covariate on my model.
 
12
I also run a similar model using participant’s confidence about Amrano’s ability to “continue to meet analysts’ expectations for strong growth in revenue and earnings in the foreseeable future” as a proxy for expectations about future price performance. The only difference in results is that the interaction between crisis type and crisis response is significant. All inferences concerning the hypotheses remain unchanged, strengthening my acceptance of H2 and rejection of H3.
 
13
I use a composite measure of six questions (= 0.88) about CEO Dan Athens that capture dimensions of trustworthiness like integrity, competence, honesty, and desire to avoid similar issues in the future.
 
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Metadata
Title
“Just Say You’re Sorry”: Avoidance and Revenge Behavior in Response to Organizations Apologizing for Fraud
Author
Michael J. Wynes
Publication date
18-03-2021
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 1/2022
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-021-04781-9

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