Does a Firm's Exposure to Ethical Issues Matter to Financial Markets? A Governance Perspective

Denis Cormier () and Michel Magnan
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Denis Cormier: ESG UQAM
Michel Magnan: Concordia University

No 2014-32, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: This paper investigates if a firm's ethical issues, in conjunction with its governance, affect its standing within financial markets. A firm's ethical reputation 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, i.e., 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 (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 issues do not seem to pay.

Keywords: Corporate governance; ethical issues; information asymmetry; stock markets (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-11
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:gre:wpaper:2014-32

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