Announcing a restatement—correcting a previously issued financial statement—is known to destroy trust in a firm’s financial reporting, and can negatively influence investors. But the use of online video to convey the bad news can cushion the blow, provided the firm takes full responsibility for the error, according to new research out of the University of Washington Foster School of Business and the University of Illinois at Urbana-Champaign.
“When a company has an extremely negative event to report, there are potential advantages to communicating the information via online video versus written press release,” says co-author Lisa Sedor, an assistant professor of accounting at the Foster School. “The market is comprised of human beings; there’s much more at play in their decision-making process than the sole consideration of financial data. Investor trust in upper management is important as well.”
Study in trust
In the study, executive MBA students were presented a fictional firm’s restatement announcement in which the CEO either accepted full responsibility for the error or deflected blame across the industry. One group viewed the CEO—a retired newscaster playing the part—explaining the restatement via online video. The other group read the same announcement online in a press release. Both groups were then asked to rate their trust in the CEO and his firm, and to make investment recommendations.
The researchers found that when the CEO assumed full responsibility for the restatement by citing a company-specific error, the people who watched the video recommended investing more in the firm than did those who read the press release online.
However, when the CEO deflected blame for the restatement by citing an industry-wide error, the online video announcement no longer limited damage to investor trust.
A growing concern
Late in a decade rife with accounting scandals, it’s increasingly difficult for corporations to retain investor trust. Although many firms have begun presenting video annual reports, firms have been slow to announce bad-news events such as restatements in the comparatively personal format of video.
But not for long, Sedor predicts. She believes that online video is a powerful communication tool likely to aid firms’ efforts in this regard. The stakes for both investors and firms are high. The General Accounting Office reports that the market capitalization of restating companies decreased more than $36 billion from 2002 to 2005 alone.
“Our evidence is important given both the dramatic increase in the number of restatements over time and the SEC’s recent emphasis on transitioning to Internet-based disclosures,” says Sedor. “Investors of the future are going to be individuals raised with the Internet and online video. We’re already seeing evidence that people are turning away from television and print and turning to online video for trustworthy information. It’s only a matter of time before we see firms use online video to communicate more effectively with investors.”
The paper, “Using Online Video to Announce a Restatement: Influences on Investor Trust and Investment Decisions,” is the work of Sedor, W. Brooke Elliott, an assistant professor of accountancy at the University of Illinois at Urbana-Champaign, and Frank Hodge, the Herbert O. Whitten Professor of Accounting at the Foster School.