Does a firm’s exposure to ethical failures matter

Authors: Denis Cormier Michel Magnan

Publish Date: 2016/02/08

Volume: 21, Issue: 2, Pages: 267-289

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Abstract

This paper investigates if a firm’s ethical reputation in conjunction with its governance affects its standing within financial markets A firm`s ethical reputation as measured by ethical failures arises from its involvement in ethical violations and incidents while a comprehensive index proxies for governance We assess a firm’s standing within financial markets through two complementary perspectives ie the level of information asymmetry between managers and investors as inferred from analyst forecast dispersion and analyst forecast error and the relation between a firm’s earnings and its stock market valuation or return value relevance Our results suggest that a firm`s ethical reputation affects financial analysts’ forecasts as well as the stock market value assigned to its reported earnings Moreover it appears that corporate governance moderates such relations with strong weak governance compensating for a weak strong ethical reputation Overall our evidence shows that ethical failures do not seem to payWe acknowledge financial support from Autorité des marchés financiers Québec the Social Science and Social Sciences and Humanities Research Council of Canada SSHRC the SA Jarislowsky Chair in Corporate Governance Concordia University and the Institute for the Governance of Public and Private Organizations All usual caveats apply

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