Abstract
Our paper examines how prior trust moderates consumer and firm responses to a firm's failures. We document that relatively high prior trust in a firm can help firms better recover from the negative effects of denying versus accepting failures, but that trust offers greater protection against competence as compared to ethical failures. We also consider the effects of two responses to ethical failures - external attribution and monetary compensation - and demonstrate that these responses may be viable alternatives that yield consumer perceptions that are as favorable as denying ethical failures. Finally, we show that reticence - neither confirming nor disconfirming a failure -elicits the least favorable post-recovery consumer responses. Our findings suggest that it may be possible for a firm to recover from an ethical failure even after accepting the failure, which is an important contribution since little prior research supports a successful recovery from ethical failures.
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