The Price of Integrity
71 Pages Posted: 23 Jan 2018 Last revised: 7 Mar 2019
Date Written: March 6, 2019
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
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