What Shareholders Do: Changing Signal Reliance Around Financial Misconduct and New CEO Appointment.

Past studies on corporate reputation have shown the importance of having good reputation. Recently, however, research has started to examine how firms can repair their damaged reputation. Yet, our understanding of reputation damage and repair is still limited because so far studies focus on what firms should do but not what stakeholders might do. For example, do stakeholders change only their evaluation of a compromised firm or actually alter the process by which they evaluate such a firm? In this study we take the perspective of the shareholders and ask whether and how shareholders change their evaluative process following a reputation-damaging event and a reputation-restoring effort. We show that shareholders fundamentally change the process by which they evaluate a firm following certain signals but do this in a rather sophisticated way to maximize their interests, and that shareholders seem to keep track of a firm's past wrongdoing and reverse all their earlier reactions following positive signals from the firm. [ABSTRACT FROM AUTHOR]