Living up to your codes? Corporate codes of ethics and the cost of equity capital

Authors

Hong Kim Duong
Marco Fasan
Giorgio Gotti, The University of Texas Rio Grande Valley

Document Type

Article

Publication Date

12-13-2021

Abstract

Purpose

Previous literature provides mixed evidence about the effectiveness of a code of ethics in limiting managerial opportunism. While some studies find that code of ethics is merely window-dressing, others find that they do influence managers' behavior. The present study investigates whether the quality of a code of ethics decreases the cost of equity by limiting managerial opportunism.

Design/methodology/approach

In order to test the hypothesis, the authors perform an empirical analysis on a sample of US companies in the 2004–2012 period. The results are robust to a battery of robustness analyses that the authors performed in order to take care of endogeneity.

Findings

Empirical results indicate that a higher quality code of ethics is associated with a lower cost of equity. In other words, firms with a more comprehensive code of ethics and better-designed implementation procedures limit managerial opportunism and pay a lower cost of equity because they are perceived by investors to be less risky.

Research limitations/implications

Practical implications

Social implications

Originality/value

The authors contribute to the literature in two ways. First, by looking at the market reaction to the code of ethics, thus capturing all its indirect possible benefits and second, by measuring not only the existence but also the quality of a code of ethics. Based on the results, policymakers may choose to further promote codes of ethics as an effective corporate governance mechanism.

Comments

©Hong Kim Duong, Marco Fasan and Giorgio Gotti. Published by Emerald Publishing Limited.

Recommended Citation

Duong, H. K., Fasan, M., & Gotti, G. (2021). Living up to your codes? Corporate codes of ethics and the cost of equity capital. Management Decision. doi.org/10.1108/MD-11-2020-1486

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Publication Title

Management Decision.

DOI

10.1108/MD-11-2020-1486