An examination of management responsibility in shock events on shareholders’ wealth and reputation‐repair actions to rebound losses

This paper investigates the impact of management responsibility in corporate shock events on shareholders' wealth and the types and frequency of repair actions taken to mitigate reputational losses. Information theory and market psychology suggest that shock events resulting from management faults signal ineffective firm management that reduces market participants' trust in a firm's operations. We utilize a sample of corporate shock events with attributed‐firm responsibility ranging from weak to strong and test the above‐stated objectives. Our results show that attributed‐firm responsibility in shock events has a significant negative effect on shareholders' value. The results also highlight positive relationships between firms' levels of responsibility for events and both the number of types and repair actions that firms pursue. In addition, firms announcing reputation‐repair actions were able to rebound a significant portion (41%) of their reputational losses. These findings extend academic research into the cause and consequences of shock events and the repair actions pursued by firms. For practitioners, the results signal the significant negative consequences of shock events and suggest that management should strengthen controls to avoid shock events; but if one was to occur, management should pursue reputation‐repair actions to rebuild market participants' trust and rebound shareholders' losses.