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

26 Pages Posted: 21 Aug 2007  

Tim Loughran

University of Notre Dame

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance

Hayong Yun

Michigan State University - Department of Finance

Date Written: August 16, 2007

Abstract

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, Jensen, and Zaffron (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.

Keywords: ethics, 10-K filings

JEL Classification: A13, G30, M40

Suggested Citation

Loughran, Tim and McDonald, Bill and Yun, Hayong, A Wolf in Sheep's Clothing: The Use of Ethics-Related Terms in 10-K Reports (August 16, 2007). Available at SSRN: https://ssrn.com/abstract=1007727 or http://dx.doi.org/10.2139/ssrn.1007727

Tim Loughran (Contact Author)

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Bill McDonald

University of Notre Dame - Mendoza College of Business - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Hayong Yun

Michigan State University - Department of Finance ( email )

645 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)

HOME PAGE: http://https://sites.google.com/site/hayongy/

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