The Price of Integrity

71 Pages Posted: 23 Jan 2018 Last revised: 25 Jul 2018

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: July 12, 2018

Abstract

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

Chen, Chen and Xia, Ying and Zhang, Bohui, The Price of Integrity (July 12, 2018). 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 )

Register to save articles to
your library

Register

Paper statistics

Downloads
91
rank
268,590
Abstract Views
526
PlumX