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The effect of published reports of unethical conduct on stock prices

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Abstract

This study adds to the empirical evidence supporting a significant connection between ethics and profitability by examining the connection between published reports of unethical behaviour by publicly traded U.S. and multinational firms and the performance of their stock. Using reports of unethical behaviour published in the Wall Street Journal from 1989 to 1993, the analysis shows that the actual stock performance for those companies was lower than the expected market adjusted returns. Unethical conduct by firms which is discovered and publicized does impact on the shareholders by lowering the value of their stock for an appreciable period of time. Whatever their views on whether ethical behaviour is profitable, managers should be able to see a definite connection between unethical behaviour and the worth of their firm's stock. Stockholders, the press and regulators should find this information important in pressing for greater corporate and managerial accountability.

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Dr. Spuma M. Rao is Associate Professor of Finance, College of Business Administration, University of Southwestern Louisiana. His publications appear in such journals as Global Finance, American Business Review, Financial and Strategic Decision Making, Business and Economic Review, The Appraisal.

J. Brooke Hamilton III is Assistant Professor in the Department of Management, University of Southwestern Louisiana. He was head of the Philosophy Department at Tuskegee Institute, spent 14 years in industry and returned to academe after completing his M.B.A. His work appears in the Journal of Business Ethics, Southeastern Journal of Legal Studies in business, and the proceeding of the Southern and Southwestern Marketing Associations.

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Rao, S.M., Brooke Hamilton, J. The effect of published reports of unethical conduct on stock prices. J Bus Ethics 15, 1321–1330 (1996). https://doi.org/10.1007/BF00411817

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