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

Abstract

PurposePrevious 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/approachIn 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.FindingsEmpirical 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/implicationsPractical implicationsSocial implicationsOriginality/valueThe 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.

MNEs’ corporate governance disclosure: a strategic response to corrupt environments

“…For instance, there are multiple studies on disclosure, especially on CSR practices (Ali et al , 2017); however, studies on the disclosure of CG-related information by MNEs are scarce in the literature. In this paper, we contribute to understanding why MNEs disclose information that helps stakeholders abroad to evaluate if managers adopt the best practices of governance and to constrain the rent-seeking behaviors of managers in the name of stakeholder interests (Cuomo et al , 2016; Duong et al , 2021; Karpoff, 2021).…”

Efektivitas Pendidikan Etika Dan Kode Etik Bagi Aparatur Sipil Negara Untuk Mencegah Kecurangan

“…Kode etik merupakan upaya untuk menjadikan nilai-nilai organisasi dalam tataran praktis sebagai panduan perilaku bagi anggota organisasi. Penyusunan regulasi etika tersebut efektif mengatur perilaku dari anggota organisasi sebagaimana hasil riset Duong et al (2021) dan Kaptein & Schwartz (2008). Singh et al (2018)…”

International evidence on the relationship between corporate ethics and dividend policy

“…More recently, Zouari-Hadiji and Chouaibi (2021) show that firms with high ethics scores are associated with a reduced cost of equity capital. Similarly, Duong et al (2022) also highlight the importance of corporate ethics Corporate ethics and dividend policy by documenting that a higher quality code of ethics is associated with a lower cost of equity. Above strand of literature argues that ethicality reduces the cost of capital because firms with strong emphasis on ethics are more likely to cultivate better relationships with their stakeholders.…”

“…More recently, Zouari-Hadiji and Chouaibi (2021) show that firms with high ethics scores are associated with a reduced cost of equity capital. Similarly, Duong et al. (2022) also highlight the importance of corporate ethics by documenting that a higher quality code of ethics is associated with a lower cost of equity.…”