The Price of Integrity

71 Pages Posted: 23 Jan 2018 Last revised: 7 Mar 2019

See all articles by Chen Chen

Chen Chen

Monash University - Department of Accounting

Ying Xia

Monash University - Monash Business School

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: March 6, 2019

Abstract

This paper examines the effect of integrity culture on financing costs. We construct four measures to capture firms’ integrity culture based on two different data sources, the first one collects employees’ comments on firms’ integrity culture from Glassdoor.com and the second one is Asheley Maison, a website designed to facilitate extramarital affairs. We find a negative relationship between financee’s integrity and its financing costs, i.e. bank loan spread and cost of equity. Using the Massachusetts’ Alimony Reform Law of 2011 as an exogenous shock to integrity culture, forced departures of CEOs due to managerial indiscretions as a quasi-natural experiment, and instrumental variable approach, we establish a causal effect of financee’s integrity on financing costs. In addition, we find that our integrity measures can predict future stock returns. We further show that lower integrity level can increase the financing costs through opaque accounting information and excessive corporate risk taking.

Keywords: Integrity, Bank Loan Spread, Cost of Equity

JEL Classification: M14, G21, G12, G30

Suggested Citation

Chen, Chen and Xia, Ying and Zhang, Bohui, The Price of Integrity (March 6, 2019). Available at SSRN: https://ssrn.com/abstract=3107405 or http://dx.doi.org/10.2139/ssrn.3107405

Chen Chen

Monash University - Department of Accounting ( email )

Building H, Level 3
Caulfield campus
Melbourne, Victoria 3800
Australia

Ying Xia (Contact Author)

Monash University - Monash Business School ( email )

900 Dandenong Road
Caulfield Campus
Melbourne, Victoria 3145
Australia

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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