The Price of Integrity
71 Pages Posted: 23 Jan 2018 Last revised: 25 Jul 2018
Date Written: July 12, 2018
This paper examines the effect of integrity culture on financing costs. We use two measures to capture firms’ integrity culture. The first one collects employees’ negative comments from Glassdoor.com, where employees can express criticisms on firms’ integrity culture. The second measures the number of users within a firm who use AsheleyMaison, a website designed to facilitate extramarital affairs. Using both measures, we find a strong negative relationship between financee’s integrity and 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 and the instrumental variable approach, we establish that the decrease in financee’s integrity increases both bank loan spread and cost of equity. In addition, we find that our integrity measure can predict the cross section of stock returns. We further show that lower integrity level can increase the financing costs through opaque accounting information and excessive risk taking.
Keywords: Integrity, Bank Loan Spread, Cost of Equity
JEL Classification: M14, G21, G12, G30
Suggested Citation: Suggested Citation