Image repair during a U.S. Securities and Exchange Commission investigation

Abstract

AbstractThis paper examines management's image repair strategies present in disclosures noting a firm's involvement in an SEC investigation. This empirical analysis employs a systematic content analysis of managements' 10‐K disclosures released from 2010 through 2019. The sample is drawn from firms identified in SEC accounting and auditing enforcement releases. This research suggests that management's disclosure concerning an SEC investigation commonly focuses on adding positive information to the disclosure (bolstering) and discussing plans to solve the problem. Managers commonly employ multiple image repair tactics within the same 10‐K. These findings have key implications for financial reporting regulators and accounting standards setters concerned with understanding how managers may manipulate disclosures. Investors may also be interested in understanding how company managers attempt to restore the firm's reputation when the firm is undergoing regulatory scrutiny. Further, the findings of this study enhance the knowledge of corporate image restoration strategy. This paper is the first to focus on managements’ use of image repair disclosure strategies when a securities regulator is investigating the firm.