A NEW study has found that when CEOs take responsibility for financial restatements and deliver the bad news via online video, investors’ trust in management rises and they recommend larger investments in the firm.
Researchers designed a simulation using a former television news presenter posing as a CEO. They found that when he accepted full responsibility for errors in his company’s financial reporting, investors who viewed the explanation in an online video made larger investments in the firm and were more confident in the firm’s future ability to meet analysts’ expectations compared to those who read a text version of the announcement.
However, when the CEO denied responsibility and blamed the restatement on an industry-wide issue, investors viewing an online video of the announcement trusted the CEO less and recommended smaller investments than did investors who viewed the restatement announcement online in text.
The study is significant because it suggests that video magnifies investors’ perceptions of CEO credibility. It also suggests that it is better for companies to admit mistakes openly and not be defensive or try to shirk responsibility.
The findings are contained in a paper entitled Using Online Video to Announce a Restatement: Influences on Investor Trust and Investment Decisions by professors Brooke Elliott, University of Illinois, Frank Hodge, University of Washington, and Lisa Sedor, DePaul University.
“These findings are important given the dramatic increase in the number of restatements over time, the resultant deterioration of investor trust, and the Security and Exchange Commission’s recent emphasis on transitioning from traditional, paper-based to new, Internet-based disclosure venues,” say the authors.
Trust responses are complex
However, the professors are quick to point out that there is a complex interplay between investors’ trust perceptions, management’s willingness to accept responsibility, and the medium employed to deliver the disclosure. For instance, they found that people with lower levels of trust in a CEO prior to a restatement may be influenced less by video or text-based disclosure.
A question not addressed in the paper is whether the use of a television professional as the CEO in the study influenced participants’ perceptions. Many executives may not be as comfortable on camera and their delivery could well affect how viewers perceive them.
Nonetheless, the study is interesting and suggests that if your company has bad news to deliver, a video address by the company’s CEO may help to mitigate negative fallout from the announcement.
Pam Agnew, ABC is a director of IR Web Reporting International Inc. and an award-winning communicator. She has more than 20 years of corporate and agency experience in investor, crisis, corporate, media, stakeholder and sustainability communications on four continents for leading global companies as well as stock exchanges, securities regulators and large institutional investors.
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