INVESTIGATING STOCK MARKET REACTION TO ...

!1 **************PrePublication Draft****************** Published paper (changed from below) appears at https://www.springerprofessional.de/do-investors-see-value-in-ethically-sound-ceo-apologies-investig/10616174

DO INVESTORS SEE VALUE IN ETHICALLY SOUND CEO APOLOGIES? INVESTIGATING STOCK MARKET REACTION TO CEO APOLOGIES

Daryl Koehn & Maria Goranova

Since the late 1990s, the number of apologies being offered by CEOs of large companies has exploded (Lindner, 2007; Adams, 2000). Communication and management scholars have analyzed whether and why some of these apologies are more effective or more ethical than others (Souder, 2010; Benoit, 1995a; Benoit & Czerwinski, 1997). Most of these analyses, however, have remained at the anecdotal level. Moreover, the practical, economic consequences of apologies have not been examined. Almost no rigorous or systematic empirical work exists that examines whether stakeholders 1) reward firms whose CEOs give apologies that are more, rather than less, ethical; and 2) punish firms whose corporate apologies are not ethically sound. This lacuna is surprising given that the whole purpose of an apology is to restore trust between the apologizer and the recipients of the apology. It is also surprising, given that stock market participants do appear, in at least some cases, to evaluate and respond to apologies by CEOs.

When Johnson

and Johnson was hit by the Tylenol poisonings, its stock price plummeted. One day after CEO James Burke’s apology—an apology widely praised for being ethically sound—, approximately a

half billion dollars of its previously lost stock value was restored.1 It appears, then, that a good CEO apology may lead to an increased stock value ceteris paribus. But is the Johnson and Johnson case representative of how the market responds in general to CEO apologies?

This paper explores how one group of stakeholders --the shareholders--responds to apologies that are more ethical. In particular, we consider market reactions to CEO apologies and investigate whether cumulative abnormal returns (CARs) increase or decrease in the short-term when these same firms’ CEOs give apologies that are more ethical. The Need for Examining Shareholder Response to Corporate Apologies An apology can be defined as a “verbal exchange in which a corporate leader … speaks in a way that aims at a future reconciliation between the offending party and those whom the… apologizer’s firm has harmed or offended”(Koehn, 2013: 240). As this definition makes clear, the offering of an apology is an exercise designed at restoring trust. The apology should be designed so as to make such a restoration as likely as possible (Goffman, 1972).

If that is the goal, then it is reasonable to examine whether apologies, in fact, attain their goal. Are they efficacious? If so, with respect to which intended audience or, in the case of corporate apologies, which stakeholders? Which elements of an apology make it especially effective? Are more ethically sound apologies better at restoring trust? One of the larger bodies of scholarly research into apology efficacy focuses on “image restoration” (Kim, Avery, & Lariscy, 2009). Communications theorist Benoit (1995a, 1995b, 1997b) developed a theory of image restoration The financial effect of Burke’s 1982 apology was calculated using Eventus data for a window 1/+1 days around the date of the actual apology. 1

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using case analyses of apologies by religious leaders, sports heroes, and corporate figures and incorporated public/media records to document audience reaction. The theory assumes that goalcentered communication aims at maintaining a positive reputation (Benoit, 1995a, p. 65). Benoit and various coauthors have applied his image restoration approach to a variety of public figures, including Queen Elizabeth (Benoit & Brinson, 1999), Hugh Grant (Benoit, 1997a), and Tonya Harding (Benoit & Hanczor, 1994). The theory has been applied as well to firms as diverse as Tylenol (Benoit & Lindsey, 1987), Dow Corning (Brinson & Benoit, 1996), and USAir (Benoit & Czerwinski, 1997). Communication and management theorists have applied image restoration theory to still other cases of perceived institutional wrongdoing or missteps--e.g., Brown and Williamson’s tobacco troubles (King, 2006), Duke University’s lacrosse scandal debacle (Fortunato, 2008), and the explosion at West Pharmaceutical (Coombs, 2004). In these cases, the primary stakeholder is assumed to be some elements (media) of the larger community. Little or no attention was paid to shareholders or employees.

The problem with this image-restoration research is four-fold. First, it lumps personal, corporate, and collective/national apologies together. In fact, these three types of apologies differ significantly in their purpose and are subject to different constraints (Smith, 2008; Koehn, 2013; Villadsen, 2008; Celermajer, 2009). Therefore, corporate apologies should be investigated as a class unto themselves.

Second, the empirical basis of this research is largely anecdotal or case-based. An analysis of articles in the communications and public relations field addressing crisis communications writ-

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ten between 1991 and 2009 revealed that only nine articles relied upon experiments (Avery, Lariscy, Kim, & Hocke, 2010); none did any statistical analysis using a data base of apologies. Thus, while some of the research makes plausible claims about how audiences might receive apologies, the claims have not been tested. Instead, we have generations of scholars heaping praise on select apologies—e.g., CEO James Burke’s 1982 communications after seven deaths in Chicago were found to be due to poisoned Tylenol capsules (e.g., Murray and Shohen, 1992)— without examining whether these apologies actually did restore stakeholder trust in the firms and products in question.

Third, in addition to being non-empirical and conflating very different types of apologies, the communications and public relations research into apologies has focused to date primarily upon consumer responses to leaders’ apologies. Insofar as these disciplines’ research into apologies relies largely upon media accounts, Burns and Bruner (2000, p. 35) are right to argue that image restoration research concentrates almost exclusively on how select “elites” react to apologies and ignores the reactions of non-elites. Shareholders are among a crucial class of “non-elites” whose response to apologies generally has been ignored. This oversight is serious, for in the case of most CEO apologies, the primary stakeholders typically are shareholders and consumers.

One would expect economists and sociologists to have looked at the empirical impact of various types of apologies with respect to shareholders. No such studies appear to exist in the economics literature. Economists who study behavior in trust games have observed that participants use apologies to attempt to restore trust (Schniter, Sheremeta, & Szynycar, 2012). But economists

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have paid scant attention to the precise nature of the apologies offered, much less to what extent the apologies themselves are ethical and to how shareholders react to more or less ethical apologies. For their part, sociologists have devised experiments with a view to exploring which forms of apologies best restore injured parties’ trust in the apologizer. Fehr and Gelfand (2010) found that apologies are most effective in securing victims’ forgiveness when the apologies match victims’ self-construals. Ferrin, Cooper, Kim, & Dirks (2007) contend that silence is more effective at restoring trust than apologies or denials when the perceived violation involves a breach of integrity rather than a failure of competence. In all of these cases, however, the data are not drawn from actual stakeholders of companies but rather involve subjects who have volunteered to participate in experiments using rather artificial scenarios.

A fourth blind spot in the restoration research concerns how apologies have been construed. Much attention has been paid to the logical content of apologies (e.g., does the speaker take responsibility for the perceived wrongdoing?) (Robbennolt, 2006; Benoit, 1995a). A few communication scholars have attempted to analyze not only the content of the apologies but also the dramatic or ritualistic aspects of apologies offered by leaders (Benoit, 1995a) and the symbolism implicit therein (Hearit & Courtright, 2003). However, aspects of an apology other than its content may significantly affect how an apology is heard. Almost no theoretical or empirical attention has been paid, for example, to how context, emotional persuasiveness, or the conveyed character of the speaker affects how the audience hears the apology (Koehn, 2013).

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This paper aims to remedy these deficiencies. Our analysis takes into account multiple dimensions of a corporate apology described in detail in the next section. We focus only on corporate apologies offered by CEOs. Using a database of CEO apologies, we examine how shareholders respond to more or less ethical CEO apologies. In particular, we consider whether the cumulative average returns (CARs) for firms increase (in the short-term) when a CEO apology is relatively more ethical or decline when relatively less ethical. Here we restrict our analysis to the stock market's short-term reaction to CEO apologies. While longer event periods would ensure that we capture all effects, the estimates would be less reliable (Weston, Siu, and Johnson, 2001), given the larger amount of noise in the data and the difficulty in controlling for a host of firmspecific factors that might affect its stock price over several years (e.g., a change in corporate strategy or corporate leadership, additional scandals, product setbacks, etc.). In addition, we do not distinguish here among different types of investors (e.g., day traders vs. institutional investors). In the conclusion, we suggest that, in light of our results, future empirical research into market response to corporate apologies should distinguish among the types of investors who hold corporate stock. THEORETICAL FRAMEWORK To explore whether shareholders in publicly traded firms see value in ethically sound CEO apologies, we use the corporate apology framework developed by Koehn (2013). This framework identifies three major aspects of a corporate apology--the logos or content of the apology; the ethos or conveyed character of the speaker; and the pathos or emotional appeal of the apology. Koehn (2013) further breaks down each of these categories identifying key elements belong-

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ing to each category. Before briefly discussing each element, we provide a short overview of the Koehnian framework. The Koehnian Framework for Assessing the Ethics of Corporate Apologies As was already noted, Koehn defines an apology as a “verbal exchange in which a corporate leader

… speaks in a way that aims at a future reconciliation between the offending party and those whom the… apologizer’s firm has harmed or offended” (Koehn, 2013: 240). Koehn stresses that an ethically sound apology is one that is designed or constructed so that, in principle, it could effect such a reconciliation. However, there are no guarantees that even a well-crafted apology will, in fact, restore trust. An apology may fall on deaf ears; some audience members may be so angry that they have no interest in ever restoring relations with the apologizer. Nevertheless, the intent or goal of an apology is to restore trust. Indeed, if a CEO delivers a poorly crafted apology that further alienates or offends the listeners, the audience may go so far as to say "that's not an apology". In Aristotelian language, the implied telos or goal of an apology--the restoration of trust between perceived offender and victim--determines whether a speech act will even be heard as an apology. Her framework thus is, at its heart, ethical in a way that the image restoration and PR research is not. It is, therefore, well-suited for an investigation into how the stock market responds to more versus less ethically sound apologies.

After offering a sustained argument for why it is necessary to treat corporate apologies as distinct from personal or national/collective apologies, Koehn draws upon Aristotle's Rhetoric to identify three aspects of ethically sound apologies that, in principle, could work to restore trust between the offending firm and its victims (Koehn, 2013). Those three elements are: logos, ethos and

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pathos.


Logos refers to the content of the apology, while ethos and pathos refer, respectively, 1) to the character of the CEO/firm conveyed through the apology or operative as a condition of how the audience may hear the apology; and 2) to the emotional and felt connection the apologizing CEO forges or fails to establish with audience members who are feeling rage, grief, fear, etc. as a result of wrongdoing they attribute to the CEO's firm (Koehn, 2013).

For Koehn, logos, ethos and pathos are conceptually distinct elements of the apology (and are confirmed as such by our statistical analysis reported below). A CEO of a firm that is well-respected and widely seen as behaving transparently and with integrity may take responsibility for fixing the perceived offense but fail to exhibit appropriate empathy. In such a case, the ethos and logos of the apology do not track to its pathos. In another cases, though, all three elements may be present. When they are so present, the audience may interpret them as mutually reinforcing. Yet, even in that case, some types of stakeholders (in our case, shareholders) may view one element as more significant than others, a possibility that needs to be controlled for and explored.

Logos or Content Elements In the Koehnian framework, ethically sound apologies have two crucial content elements. First, ethically good corporate apologies feature a CEO who names the particular wrongdoing or harm, which the firm is perceived to have committed or with which the firm has been associated (Koehn, 2013). If the CEO simply says, “Mistakes were made” or “I’m sorry,” then audience

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members have no way of knowing whether their concern has even been recognized by the CEO, much less addressed by the firm’s leadership. In the absence of such recognition, trust cannot be reestablished, and the apology will be less likely to fulfill its goal of trust restoration.

In addition, the CEO should take responsibility for fixing the problem or rectifying the harm. Note that the CEO need not assume personal responsibility for the harm itself in order for the apology to be ethically sound (Koehn, 2013). The apologizing CEO may be someone who has been brought in to “right the ship.” In that case, he or she was not even the CEO of record at the time of the event that precipitated the apology. Furthermore, corporate CEOs often do not know at the time of their apologies who was responsible for having caused the problem. Who was legally responsible is a matter that typically gets decided by the courts. Still, CEOs often are eager to rebuild trust with stakeholders after a problem has occurred that threatens their brand. Although CEOs almost certainly will not assume legal liability in their apologies, they can and do assume responsibility for ameliorating any harm that the public may impute to them. Thus, we find British Petroleum’s CEO Tony Hayward taking responsibility for helping to stop the oil spill, but never saying that BP caused the Deep Water Horizon fiasco (MSNBC, 2010). Similarly, Mattel’s CEO Bob Eckert outlined the various steps Mattel was taking to insure that their suppliers would stop using lead paint in the manufacturing of the firm’s toys (Consumerist.com, 2007). But Eckert never admitted that Mattel was causally responsible for the problematic manufacturing process.

Ethos or Conveyed Character

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In addition to having the two content elements (naming the offense and taking responsibility for ameliorating harm), CEO apologies are more ethical—i.e., more trustworthy--when they convey the notion that the CEO has a just and honest character. The speaker’s character, as revealed through speech itself, can influence the extent to which the audience perceives the character of the apologizing person as virtuous (or at least struggling to be virtuous) (Rap, 2010). As Halloran (1982: 60) concisely explains, “In its simplest form, ethos is what we might call the argument from authority, the argument that says in effect, ‘Believe me because I am the sort of person whose word you can believe’.” In the case of business communications, the audience’s perception that the speaker is trustworthy makes what he or she says more credible (Higgins and Walker, 2012).

Conveying an ethically trustworthy character depends upon three elements --promptly accepting responsibility, exhibiting a virtuous and wise character, and choosing an appropriate venue for delivering the apology (Koehn, 2013). First, prompt acceptance of responsibility for fixing a perceived problem or offense tends to make for a more ethical apology. Apologizing within a week of the offense suggests that the CEO and the offending firm are eager to make things right. That eagerness can persuade the audience that the firm is just and does not want to be party to an ongoing harm (Lewicki & Bunker, 1996) and that the firm will, in fact, honor its commitment to rectify the problem.

Second, apologizing CEOs are more likely to be believed if they are thought to have a virtuous character as evidenced by a history of acting well and making wise choices. CEOs who have

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received bad press for past actions of their firms and who have never before apologized or who have offered a botched apology, presumably may find it harder to persuade the audience to repose trust in their firm now.

A third element of conveyed character stems from the CEO’s choice of venue and context for the apology. If the context contradicts or does not support what the speaker is saying, then the audience may view the apology with skepticism. After discussing quality control problems with Toyota cars, the CEO Akio Toyoda left the venue in an Audi. He should have realized that choosing to exit in any car other than a Toyota would send the wrong signal. Viewers would conclude either that Toyotas were so unsafe that even the car manufacturer’s CEO did not want to drive that make of car; or that the CEO was so tone-deaf to what Toyota owners were saying about their fears that he did not think it worthwhile to choose a more appropriate venue (i.e., one that did not contractually require him to drive anything but a Toyota). In the first case, the audience may doubt the CEO’s veracity; in the second case, his practical wisdom and virtue may be called into question. Either way, the CEO’s statement will not serve to reestablish a basis for trust between the car owners and the firm.

The Koehnian treatment of ethos does not turn on whether the apology is, in fact, sincere. Instead, the approach looks at factors such as context, the alacrity with which the apology is offered by the CEO/firm, and the firm's past history when it comes to offering apologies. Some organizational scholars’ work on impression management, ingratiation, and persuasion (e.g. Davidson, Jiraporn, Kim, Nemec, 2004; Stern & Westphal, 2010; Westphal & Bednar, 2008) in-

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dicates that managers may opt simply to pretend to be truly dedicated to making things right.3 However, ascertaining genuine sincerity is notoriously difficult. So we have intentionally tried to avoid having to judge it.

Pathos or Audience Feelings What the audience feels both before and during a CEO apology affects how the apology will be received. Audience members typically feel rage and/or fear as a result of some injustice or wrongdoing they impute to the apologizing CEO’s firm. To the extent that the CEO acknowledges and speaks so as to placate these feelings, the apology arguably should be seen as more persuasive. Three elements contribute to an apology’s emotional persuasiveness--making the apology in person, showing empathy toward victims, and detailing measures for rectifying the problem leading to the apology (Koehn, 2013).

One key way in which CEOs can engender good will is to deliver their apologies in person. By doing so, they show that they are willing to be held accountable by their victims. This willingness may reinforce the responsibility-taking content/logos element discussed above. By appearing in person, the CEO signals that the firm is taking the perceived injury seriously. That signal can itself go some way toward lessening the victims’ anger and fear (Koehn, 2013).

In addition, when the CEOs show empathy by explicitly acknowledging audience members’ frustration and by demonstrating that they aware of specific ways in which these members are suffering, those receiving the apology have a reason to begin to trust the firm again in a provisional

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way. They can feel that the CEO and the firm share an emotional bond with them. Insofar as emotions set us in motion, the apology recipients may also find it more plausible that the firm will actually do something to set matters aright (Koehn, 2013).

That observation brings us to a third element of the apology’s pathos--the firm’s follow through (Koehn, 2013). Audience members often are looking to move on, to get their lives back in order after suffering some harm. CEOs should, therefore, specify what they and their firms are doing now to make things right and should explain how they will seek to insure that the problems or wrongdoing do not recur (Austin, 1962).1 Again, note that none of the three elements for assessing pathos turn on knowing for a fact that the CEO is sincere. Koehn’s criteria are observational—the promptness of the apology, the existence of firm follow through, and public acknowledgement of the possible suffering of those harmed by a firm’s action.

HYPOTHESES

Our four hypotheses build upon and test the Koehnian approach to ethically sound apologies.

Hypothesis 1: The more ethical the apology of a firm’s CEO is overall (i.e., the more elements of desirable logos, ethos, and pathos the apology incorporates), the more positively the stock market will respond to the apology. An ethically good apology typically aims at restoring trust. Investors who do not trust a firm’s leadership would not be likely to invest in the firm. Furthermore, if investors come to believe

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that customers will desert a firm, they are unlikely to want to buy stock in the firm. For these reasons, if the apologizing CEO’s apology contains relatively more of the desirable Koehnian elements of an ethically sound apology, then one would expect that the firm’s stock price would increase or that the stock decline would be smaller as investors seek to buy shares or as current investors decide to hold, rather than to sell, their shares.

Hypothesis 2: The more ethically desirable content/logos elements a CEO’s apology contains, the more positively the stock market will respond to the apology. The rationale for our second hypothesis echoes that for Hypothesis 1. Insofar as those hearing the apology are looking for some basis on which to reconcile with the offending firm, one would think that investors would view a firm more favorably when its CEO has acknowledged there has been a specific problem and has taken responsibility for ameliorating harm.

Hypothesis 3: The more ethically sound the conveyed character/ethics of the apologizing CEO is, the more positively the stock market will respond to the apology.

When the ethos of the apology is good, the CEO ought to be viewed as more believable. When the CEO’s apology is more believable, stakeholders should be more inclined to trust the leadership of the firm and, hence, the firm itself. Conversely, if the CEO’s conveyed ethos is not sound, employees, customers, regulators, and investors may think that the firm is in disarray, has no strategy, or is involved in a cover-up. All of these possibilities should, in theory, depress the value of the stock of a firm that is coming off of some sort of public relations fiasco.

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Hypothesis 4: The more the CEO’s apology addresses the audience emotions or pathos in an appropriate way, the more positively the stock market will respond to the apology.

When audience members feel that their concerns are not being addressed or taken seriously, they may not be inclined to want to repose trust in a firm or to deal with that firm going forward. If so, a firm whose CEO offers an empathetic, in-person apology detailing how the firm plans to address the audience’s anger and fears should engender greater trust among consumers and, hence, investors.

METHODOLOGY Sample Data on CEO apologies was collected from Google searches and from searches of peer-reviewed articles. The key search words consistently used were “CEO,” “apology”, “apologizes”, and “apologized”. Data collection resulted in 105 CEO apologies spanning the period from 1982 to 2012. Due to a lack of data availability, we dropped from the sample foreign and privatelyowned firms. Firms’ stock prices and market returns were obtained from the Center for Research in Security Prices (CRSP) database. In order to compute cumulative abnormal returns, we compared firm’s stock performance to an equally weighted market portfolio index that includes all distributions. Complete stock price data was available for 72 CEO apologies. In multivariate regressions, we also controlled for firm size and industry-adjusted performance using Compustat data. Missing and incomplete data reduced our sample to 66 observations. Student residuals di-

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agnostic revealed that two outliers (Tyco with Dennis Kozlowski’s indictment and Odwalla’s link to an e-coli outbreak) had undue influence on the regression results. Consequently, we removed these companies from the analyzed sample.

Methods

In order to investigate the impact of CEOs apologies, we conducted a standard event study as well as hierarchical regressions using ordinary least squares. Dependent variable. Event study methodology has become a dominant empirical approach for assessing the effects of managerial actions on shareholder wealth (Shleifer and Vishny, 1997; Walsh and Seward, 1990). To calculate cumulative abnormal returns (CARs), we first obtained abnormal returns (AR) for firm j by following the procedure outlined by Brown and Warner (1985):

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, where we estimated the parameters !

by regressing the

firm’s returns on market returns for a period of 240 to 40 days preceding the issuance of the CEO apology (e.g. Mueller and Sirower, 2003). We aggregated ARs for a period of three days surrounding the announcement of the CEO apology2. The event window incorporated the day before, the day of, and the day after the giving of the apology. While using longer event periods would ensure that all effects are captured, the estimates would be subject to more noise in the data (Haleblian, Devers, McNamara, Carpenter, & Davison, 2009; Weston, Siu, and Johnson, 2001).

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Independent variables. Each apology was coded for 1) naming the wrongdoing or offense (logos); 2) assuming responsibility for ameliorating harm (logos); 3) prompt issuing of the apology (ethos); 4) providing evidence of a settled, virtuous character (ethos); 5) wisely choosing a supportive/consistent context for making the apology (ethos); 6) giving the apology in person (pathos); 7) showing empathy (pathos); and 8) specifying what exactly the firm plans to do to insure the offense does not occur again and that any harm is lessened (pathos).

If the apology specified the offense, it was coded a “1”; if not, a “0”. If the CEO indicated that the firm was assuming practical (though not legal) responsibility for ameliorating any harm related to the offense, the apology was coded a “1”; if no such indication was provided, the apology was marked as a “0.” A similar binary system was used for the ethos and pathos elements. Apologies given within seven days of when the offense occurred were deemed “prompt” and coded with a “1”. Apologies given after a week were assigned a “0”. If the apologizing CEO and/or his firm had received a fair amount of bad press in the past five years; or if the CEO had been forced to issue a series of apologies during his tenure, the apology received a “0” when it came to conveying a settled, virtuous character. In cases where the firm had a good ethics reputation (e.g., had received awards for being particularly good place to work) or where the reputation was neutral, the apology received a “1” with respect to conveying a virtuous ethos. As long as the context and venue for issuing of the apology were consistent with the apology’s message, the apology was code a “1”; if the venue contradicted or in some other way undermined the message, it was coded a “0”.

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An apology was coded with a “1” for being given “in person” when the CEO held a press conference or released a letter or email under his own name with his approval; apologies issued by the firm that were not delivered in these ways (e.g., an unsigned statement was released by the firm’s top management) were coded “0”. When the CEO’s apology explicitly noted the harm victims had suffered and their pain, anger or fear, that apology was coded “1”. Apologies that never mentioned victims or their suffering were coded “0”. Finally, when the apology listed some specific measures the firm was taking to rectify the problem or to insure it never occurs again, it received a “1”. If the CEO made mention of no specific remedial actions or said only that “measures would be taken”, the apology was coded “0”.

We tested in three ways whether apologies that are more ethical are better received by the market. To test Hypothesis 1, we summed all components to arrive at a numerical composite measure of how ethical the focal apology was. An apology with a higher overall score counted as “more ethical”. To test Hypotheses 2, 3, and 4, we grouped the apology’s components into three factors: logos, ethos, and pathos. The category of logos/content combined the scores for naming wrongdoing and for assuming responsibility. The ethos/conveyed character category had three components: prompt acceptance of responsibility, settled virtuous character, and chosen context consistent with the content of the apology. The third category of pathos/emotional persuasiveness aggregated the scores for an “in-person” apology, projected empathy, and specified followthrough remedial measures. Finally, we reran the regression with all of the above-mentioned ethical measures.

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Controls. The market reaction to the CEO apology might be influenced by the firm’s visibility with the market reacting more strongly to more visible firms (Lee and James, 2007). Consequently, we controlled for firm size by including firm’s assets as reported at the end of the fiscal year prior to the apology. As this variable is skewed and kurtotic, we applied a natural log transformation to it. Following Zhang and Rajagopalan’s (2010) approach, we also created an industry-adjusted measure of performance by calculating the average return on assets (ROA) for the 4-digit SIC industry in which the focal firm operates and then subtracting it from the firm’s ROA. Data for the control variables was obtained from Compustat. To ensure that the control variables temporally precede the CEO apology, we lagged the controls. Firm size and industryadjusted performance were, therefore, taken at the end of the fiscal year preceding the year of the CEO apology.

RESULTS

Table 1 presents market reaction to apologies based on their overall ethical score. The cumulative abnormal returns (CARs) for our sample are -0.006 (S.D. 0.05), not significantly different from zero. To compare the market reactions to more versus less ethical apologies, we coded an apology as “ethical” if it scored four or more when we summed all the different apology components. Although we expected a positive market reaction to more ethical apologies, the stock market and investors reaction is negative, though not significantly different from zero for more ethical apologies.

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-----------------------------Insert Table 1 about here ------------------------------

Summary statistics and correlations are presented in Table 2. CARs are positively correlated with firm size (r=0.33, p