Corporate ethics programs: Reducing risks or wasting money? – Insights from the investors’ perspective
67 Pages Posted: 29 May 2019 Last revised: 24 Mar 2021
Date Written: März 24, 2021
Is there an association between a firm's corporate ethics program (CEP) and investors' assessments of firm risk? Which particular factors of a firm's CEP drive this relationship? We explore these questions by examining the CEPs of 150 publicly listed German firms from 2014 to 2018. To do so, we create a CEP index by aggregating 24 clearly identifiable items - based on publicly available corporate reports - and make three main contributions: i) The detailed descriptive statistics of the developed index allow managers to benchmark their firms' CEPs. ii) We find that a higher CEP index reduces downside equity risk but increases credit risk. This indicates that the decreased likelihood of extreme losses but increased day-to-day costs that result from a relatively comprehensive CEP benefit equity investors at the expense of debt investors. iii) Based on a factor analysis, we observe that internally institutionalized CEP items drive this equity risk-reducing effect, while credit risk only decreases via external auditors' involvement. Supplemental analyses demonstrate that investors suspect that soft CEP items are pure lip service, as there is no strong relation between these items and risk. Moreover, the implementation of additional CEP items is shown to be particularly beneficial for firms that already have comprehensive CEPs in place. Finally, we observe some indication that the equity risk-decreasing effect outweighs the debt risk-increasing effect.
Keywords: Corporate ethics programs, investors' risk assessments, non-financial reporting
JEL Classification: G32, G34, M14, M4
Suggested Citation: Suggested Citation