Abstract for: Dynamic Analysis on a Corporate Scandal and Its Recovery Process

This study aims to reveal the fundamental structure and dynamics behind the lagged impact of a corporate scandal on its sales decline using the System Dynamics (SD) approach. The model simply represents a generic cycle of a corporate scandal and is calibrated to fit the data presented in a White Paper on the National Lifestyle 2008 published in Japan. These results show that the management of a corporate scandal becomes more difficult mainly because of a temporal improvement after the scandal without recognizing the fact that a steeper customer turnover occurs with a time delay. Appropriate corporate reactions to a corporate scandal are indispensable for corporate social responsibility but its forms vary according to the severity of the initial impact of the scandal. No reaction to a corporate scandal when the initial impact is limited sometimes results in a more desirable result for a company than that by taking some form of action, which implies that an overreaction to a small corporate scandal may ultimately result in a stronger sales decline. Ethical issues aside, this fact may cause intentional concealment of corporate scandals.