Ethical Corporate Citizenship: Does it Pay?

Abstract:     
Ethical corporate citizenship and good corporate governance have received increased attention since the financial scandals prevalent at the beginning of the millennium. This study first explores the relationship of ethical corporate citizenship to financial performance (i.e., greater profitability and efficiency, and lower cost of capital). Second, the study examines whether ethical corporate behavior is associated with a market-value premium. Results of prior studies are mixed. The results of our study contribute directly to the recent accounting literature in which specific aspects of ethical corporate behavior have been explored (Fukami et al. 1997; Ittner and Larker, 1998; Ballou et al., 2003; Clarkson et al., 2004). We match firms listed by Business Ethics magazine as The 100 Best Corporate Citizens to a sample of control firms of the same size and industry. The univariate results of our study indicate a significant relationship between ethical corporate behavior and financial performance (i.e., greater profitability and efficiency, and lower cost of capital); however, the results of multivariate tests controlling for prior year market value of equity, yielded results which indicate no direct association between ethical corporate behavior and market value. The fact that there is no meaningful market premium directly associated with being on the ethical list should not be taken to mean that there is no economic benefit associated with being ethical. The market valuation of ethical firms incorporates the normal market response associated with better financial performance (profitability, growth, and efficiency) and lower risk.

Keywords: Accounting ethics, corporate governance, corporate social responsibility

JEL Classifications: G12, G34, M41, M43

Working Paper Series