Effects of explanations communicated in announcements of alleged labor abuses on valuation of a firm’s stock

The purpose of this paper is to gauge the impact of the following on the share price of a firm that has allegedly committed labor abuses: the allegation itself, explanations (justifications and excuses) offered by the company spokesperson, and denials of responsibility for the alleged abuse.

The study uses archival data and an event study methodology.

Labor abuse allegations have a negative impact on the firm’s share price. Allegations that are accompanied by an explanation (a justification or excuse) have a less negative impact than those that are not accompanied by an explanation. Denials of responsibility have a negative influence on the share price.

If managers want to avoid a negative hit on the share price from an allegation of wrongdoing, they should provide an explanation (a justification or excuse) and avoid the use of denials.

Prior research has shown a negative impact from several types of labor abuse. This study extends prior research by showing a negative impact for all forms of labor abuse as a general category; it also extends findings from lab research on the impact of explanations on fairness judgments to a new context and a new dependent variable (the financial performance of the firm), which is on an organizational scale. It adds to the extreme paucity of empirical findings relative to the impact of denials and also adds to a small but growing literature on fairness judgments by third parties and their consequences.