This study investigates how investors use a firm's reporting lines to form judgments about the causes of internal problems. I use a rank-and-file misconduct setting to explore this. I draw on crisis management and psychology theories to predict that ...
This study investigates how investors use a firm's reporting lines to form judgments about the causes of internal problems. I use a rank-and-file misconduct setting to explore this. I draw on crisis management and psychology theories to predict that investors' likelihood of attributing rank-and-file misconduct to top management depends on how extensively the misconduct spans the firm's reporting lines and on the logic that investors use to think about the problem. I find that when investors focus on the firm's people, they attribute the misconduct to the CEO, regardless of how much it spans across reporting lines. However, when investors focus on the policies that the firm uses to manage its people, they are more likely to attribute the misconduct to the CEO when it spans more (rather than fewer) reporting lines. The results suggest that investors' perceptions of employee misconduct and other potential governance problems can be shaped by disclosures about how extensively these problems span across the firm's reporting lines.