Journal of Business Ethics

, Volume 89, Supplement 1, pp 39–49 | Cite as

A Wolf in Sheep’s Clothing: The Use of Ethics-Related Terms in 10-K Reports

  • Tim Loughran
  • Bill McDonald
  • Hayong Yun


We examine the occurrence of ethics- related terms in 10-K annual reports over 1994–2006 and offer empirical observations on the conceptual framework of Erhard et al. (Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality (Harvard Business School, Harvard) 2007). We use a pre-Sarbanes-Oxley sample subset to compare the occurrence of ethics-related terms in our 10-K data with samples from other studies that consider virtue-related phenomena. We find that firms using ethics-related terms are more likely to be “sin” stocks, are more likely to be the object of class action lawsuits, and are more likely to score poorly on measures of corporate governance. The consistency of our results across these alternative measures of ethical behavior suggests that managers who portray their firm as “ethical” in 10-K reports are more likely to be systematically misleading the public. These results are consistent with the integrity-performance paradox.


code of ethics Sarbanes-Oxley corporate governance 


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We thank Robert Battalio, Sarv Devaraj, Harrison Hong, Paul Schultz, a referee, Ann Tenbrunsel (editor), and participants at the 2007 University of Notre Dame Ethical Dimensions in Business Conference for helpful comments.


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Copyright information

© Springer Science+Business Media B.V. 2008

Authors and Affiliations

  1. 1.University of Notre DameNotre DameU.S.A.

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