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Do Investors See Value in Ethically Sound CEO Apologies? Investigating Stock Market Reaction to CEO Apologies

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Abstract

Since the late 1990s, the number of apologies being offered by CEOs of large companies has exploded (Lindner in Austin American-Statesman, 2007; Adams in USA Today, 2000). Communication and management scholars have analyzed whether and why some of these apologies are more effective or more ethical than others (Souder in Sci Eng Ethics 16:175–184, 2010; Benoit in Accounts, excuses, and apologies: a theory of image restoration strategies, 1995a; Benoit and Czerwinski in Bus Commun Q 60:38–57, 1997). Most of these analyses, however, have remained at the anecdotal level. Moreover, the practical, economic consequences of apologies have not been examined. Almost no rigorous or systematic empirical work exists that examines whether stakeholders (1) reward firms whose CEOs give apologies that are more, rather than less, ethical; and (2) punish firms whose corporate apologies are not ethically sound. This lacuna is surprising given that the whole purpose of an apology is to restore trust between the apologizer and the recipients of the apology. It is also surprising, given that stock market participants do appear, in at least some cases, to evaluate and respond to apologies by CEOs. When Johnson and Johnson was hit by the Tylenol poisonings, its stock price plummeted. One day after CEO James Burke’s apology—an apology widely praised for being ethically sound—approximately a half billion dollars of its previously lost stock value was restored (The financial effect of Burke’s 1982 apology was calculated using Eventus data for a window −1, +1 days around the date of the actual apology.). It appears, then, that a good CEO apology may lead to an increased stock value ceteris paribus. But is the Johnson and Johnson case representative of how the market responds in general to CEO apologies?

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Notes

  1. We thank an anonymous reviewer for this suggestion.

  2. Much more could be said about each of these ethically desirable elements of a CEO apology. For greater detail and argumentative support, see Koehn (2013). We have not elaborated the Koehnian framework at length because our focus here is on using this framework to investigate empirically how shareholders actually receive more versus less ethical CEO apologies.

  3. To check for robustness, we also used extended five and seven day windows. The results were substantively similar to the ones reported here. Since longer windows are subject to more noise, we report the results for the shorter, 3-day window here.

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Authors and Affiliations

  1. DePaul University, Chicago, IL, USA

    Daryl Koehn

  2. University of Wisconsin-Milwaukee, Milwaukee, MN, USA

    Maria Goranova

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  1. Daryl Koehn
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  2. Maria Goranova
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Correspondence to Daryl Koehn.

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Koehn, D., Goranova, M. Do Investors See Value in Ethically Sound CEO Apologies? Investigating Stock Market Reaction to CEO Apologies. J Bus Ethics 152, 311–322 (2018). https://doi.org/10.1007/s10551-016-3301-9

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