The Role of Organizational Slacks during a Corporate Scandal: The Effects on Firm Value and Risk
- Publication Type:
- Thesis
- Issue Date:
- 2022
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Since the late 1990s, corporate scandals are on the rise. They have far-reaching consequences in the short and long terms and bring uncertainty to a firm’s financial health, influencing investors’ expectations about the future of the firm. Corporate scandals are inevitable, complex, and difficult to manage. Thus, managers continuously look for ways to protect their firms in such a situation. Yet, research on how firm resources are used in corporate scandals is sparse to date. In particular, the mitigating role of organizational slacks – resources held by firms to deal with unexpected events – remains underexamined. Drawing on the Resource-Based View and Behavioural Theory of the Firm, my thesis aims to determine whether organizational slacks mitigate corporate scandal’s impacts on firm value and firm risk in the short and long terms. I posit that this mitigating effect depends on the type of organizational slacks, whether unabsorbed or absorbed, and on the timeframe of the strategic vision and firm’s needs. I rely on the event study methodology to measure the financial impact of corporate scandals on firms with a unique cross-sectional dataset containing 257 worldwide environmental-, social-, and governance-related corporate scandals of U.S.-listed firms from 2012-2015. Then, I analyse the distinctive mitigating roles of unabsorbed and absorbed slacks on firm values and firm risk using an ordinary least squares regression approach. My empirical analysis confirms that corporate scandals decrease short- and long-term firm values and increase firm risk. I also show that holding unabsorbed slacks helps firms through an inverted U-shape effect that mitigates the corporate scandal’s impact on short-term firm value. This effect is linear on both long-term firm value and firm risk. Holding absorbed slacks mitigates the impact of a corporate scandal only on firm risk, and the mitigating effect is linear. My thesis contributes to the organizational slacks literature by demonstrating the significant role of unabsorbed and absorbed slacks on short- and long-term firm values and firm risk in a corporate scandal’s situation, and to the research on corporate scandals by providing a richer conceptualization of corporate scandal and strong evidence of its impact on firms. From a practical perspective, I reveal that managers can attenuate the negative effects of corporate scandals by building organizational slacks during shock-free periods and using them when facing scandals. This implies that managers need to take into account short- and long-term perspectives when making strategic decisions on organizational slacks during corporate scandals.
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