The Price of Integrity

Abstract

This paper examines the effect of integrity culture on firms’ financing costs. Using different integrity measures at both firm and regional levels, we find that firms with a lower integrity level or firms located in regions lacking integrity have a higher bank loan spread and higher implied cost of equity. To address endogeneity, we adopt forced CEO turnovers due to personal indiscretions and Massachusetts’ Alimony Reform Law of 2011 as two exogenous shocks to firms’ integrity culture. We further identify accounting information quality and excessive risk taking as two channels through which integrity culture affects financing costs.

Keywords: Integrity, Corporate culture, Bank loan spread, Implied cost of equity capital

JEL Classification: M14, G21, G12, G30