Restructuring to repair legitimacy: a contingency perspective

Wang, Pengii

Abstract

Manuscript Type: Empirical Research Question/Issue: This study examines the effectiveness of restructuring in repairing legitimacy after a firm is punished for financial fraud. Research Findings/Insights: We use the antecedents of fraud to distinguish between three types of financial fraud and argue that different types of such fraud affect different dimensions of legitimacy. We also identify four types of restructuring and adopt a contingency perspective to argue that the type of restructuring adopted should match the dimensions of legitimacy affected for a successful legitimacy repair, which is proxied by a positive market response when the restructuring is announced. Using a sample of Chinese listed firms, we find that disassociation from illegitimate business operations and creation of valuable business operations are more effective in repairing legitimacy after fraudulent financial reporting. Disassociation from illegitimate organizational structures and creation of monitors are more effective following embezzlement or stock market manipulation. However, no type of restructuring is effective following improper accounting practice. Market investors value creation of monitors more than they do disassociation from an illegitimate organizational structure, and attach the same value to disassociation from illegitimate business operations and creation of valuable business operations. Theoretical/Academic Implications: This study makes three contributions to the organizational legitimacy and corporate crisis management literature. First, it links corporate crises arising from financial fraud to social legitimacy. Second, it extends the number of restructuring types identified in the legitimacy literature to four, taking content and form as two dimensions. Third, it links corporate crises arising from financial fraud to the effectiveness of responsive restructurings via social legitimacy. Practitioner/Policy Implications: Firms punished for financial fraud should signal restructuring according to the nature of the fraud and address the pertinent dimensions of legitimacy.

Journal

Corporate Governance: An International Review

Publication Name

Corporate Governance

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ISBN/ISSN

0964-8410

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Publisher

Wiley-Blackwell

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DOI

10.1111/j.1467-8683.2009.00782.x