Are Investors Ethics Agnostic?

Saravana Jaikumar, Viswanath Pingali and Vineet Virmani

No WP2015-03-12, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: In this paper we ask if the perception investors have regarding ethical nature of the management per se influences their action. In order to check for rent seeking behaviour that could arise when there is negative perception regarding ethics, we look a single company’s management whose actions – though not related to the performance of the company – have led to doubts regarding its ethical nature. Using event study mechanism, we find that when the action leads to a positive outcome for the company, the investors’ reaction is statistically insignificant. However, when another action did not lead to any potential positive outcome, the abnormal returns associated with the company’s stock are negative and significant. Therefore, it is possible that unethical practices, even if unrelated to company’s performance, lead to lesser trust regarding the company, thereby reducing the stock prices, which suggests rent seeking behaviour.

Date: 2015-03-27
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