Advertising Response to Financial Misreporting and the Implications for Firm Value
Keywords:
Advertising Spending, Restatements, Brand Crisis Management, Reputation Management, Financial MisconductAbstract
Do firms adjust advertising spending around accounting-based brand scandal events such as fraudulent restatement announcements? To address this question, this study presents an empirical assessment of firm-level advertising spending around fraudulent restatement announcements. This analysis is guided by opposing propositions presented in the brand scandal and marketing-finance literature regarding expectations for firm-level advertising response to brand scandals. To test these opposing conjectures, an empirical investigation is conducted on a sample of 136 firms accused of financial reporting fraud. The dataset is constructed using the SEC and Department of Justice enforcement action database for corporate misrepresentation compiled by Karpoff, Lee, and Martin (2008a) (KLM) and annual Compustat industrial files. The potential implications of advertising spending on post-restatement firm value are also assessed. The results of this study indicate that, on average, firms reduce advertising expenditures around fraudulent restatement announcements. The reduction in advertising is shown to effectively mitigate the potential damages to firm value. In addition to generating support and managerial guidance regarding the relevance of advertising expenditures to a firm's reputation management strategies, this paper is the first known study to investigate the relationship between advertising spending and an accounting-based brand scandal. This study also makes multiple contributions to the advertising, brand scandal, and reputation management literature.
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