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Sorry Doesn't Cut It, or Does It? Insights from Stock Market Responses to Corporate Apologies

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  • Fan, Sijia
  • Ge, Qi
  • Ho, Benjamin
  • Ma, Lirong

Abstract

This paper examines the stock market reaction to corporate apologies. We construct a comprehensive database of corporate apologies issued for major chemical disasters between 1985 and 2017. Results from event studies and cross-sectional regressions suggest that 1) on average there is no significant stock market response after a firm apologizes; but when we allow for heterogeneity in the type of apologies, we find that 2) some apologies are associated with significant abnormal returns. In particular, firms that shift the blame to others consistently experience positive abnormal returns, while firms that admit to making mistakes tend to face negative stock market reactions in the longer-term. Greater media coverage for the chemical spill and the apology is associated with a negative and positive stock market response, respectively. Our findings are consistent with a signaling theory of apologies and help shed light on corporate crisis management and understanding of what makes an effective apology.

Suggested Citation

  • Fan, Sijia & Ge, Qi & Ho, Benjamin & Ma, Lirong, 2023. "Sorry Doesn't Cut It, or Does It? Insights from Stock Market Responses to Corporate Apologies," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 68-86.
    • Handle: RePEc:eee:jeborg:v:205:y:2023:i:c:p:68-86
    DOI: 10.1016/j.jebo.2022.11.004
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    References listed on IDEAS

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    Cited by:

    1. Hornsey, Matthew J. & Chapman, Cassandra M. & La Macchia, Stephen & Loakes, Jennifer, 2024. "Corporate apologies are effective because reform signals are weighted more heavily than culpability signals," Journal of Business Research, Elsevier, vol. 177(C).
    2. Ohlrogge, Fynn & Hardies, Kris & Claeys, An-Sofie, 2024. "Investor reactions to apologies for financial misconduct," Accounting, Organizations and Society, Elsevier, vol. 112(C).

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    More about this item

    Keywords

    Corporate apologies; Chemical disasters; Stock returns; Crisis management; Environmental apologies; Reputational risk;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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