Can a Signal Mitigate a Dilemma? Quality Management Standards, Corruption, and Business Ethics
32 Pages Posted: 26 May 2021
Date Written: February 28, 2021
Firms operating in corrupt environments routinely face an ethical dilemma. On the one hand, bribery can be used as an efficient strategy to “get things done”. On the other hand, corruption is unethical, illegal, and a social ill that people detest. A corrupt environment is also informationally opaque, as the illegality of bribery is necessarily linked to secrecy. Hence, business strategies conducive to reducing information asymmetry help mitigate the ethical dilemma. One such strategy is signaling through adopting internationally recognized quality management standards such as ISO certifications. We examine the World Bank Enterprise Survey (WBES) data for almost 100 thousand firms from 2006-2019 across 141 mostly developing countries where corruption is rampant. We find that certified firms exhibit higher sales growth than uncertified firms. More importantly, we find that ISO adoption has a moderating effect on corruption activities and that the effect is stronger where corruption is more severe. Our findings have two important strategic implications. First, firms in developing countries can use ISO certification as a signal to overcome the inherent information asymmetry and facilitate growth. Second, ISO adoption also sends a signal to bureaucrats that certified firms have a more ethical culture, stronger internal controls and are not easy picks, thus mitigating the ethical conundrum.
Keywords: Quality Management Standards; International Organization for Standardization (ISO); corruption; firm growth; information asymmetry; signaling.
JEL Classification: G00, O11, O40
Suggested Citation: Suggested Citation