Avoiding the Consequences of Repeated Misconduct: Stigma’s Licence and Stigma’s Transferability

Contributing to the literature on stigma and re-legitimation, this paper examines two ways organizations may dampen the penalties associated with admissions of misconduct. Using a matched sample of firms reporting earnings restatements (141 single restating firms and 141 multiple restating firms), we find (1) that the stigma associated with a first admission of misconduct licences firms to engage in additional acts of misconduct without incurring the same penalties the second time around, and (2) that firms can effectively regain legitimacy after engaging in misconduct by replacing their CEO prior to publicly announcing the misconduct, but only when the CEO is replaced with an outsider. We argue the first finding is representative of a “licensing effect of stigma,” an unexpected positive outcome from a predominantly negative labelling process. We argue that the second finding is representative of how stigma can be successfully transferred from firms to associated organizational elites. We suggest that doing so permits the firm to re-establish its legitimacy even in the face of misconduct admissions because the leadership change re-frames new admissions of misconduct in a more positive light. Both findings help us understand why corporate misconduct may be so persistent and intractable.