Collective Reputations, the Trust Premium, and Corporate Misconduct

59 Pages Posted: 9 Jul 2021 Last revised: 6 Oct 2022

See all articles by Konan Chan

Konan Chan

National Chengchi Unversity (NCCU) - Finance

De-Rong Kong

National Taiwan University - Department of Finance

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: June 25, 2021

Abstract

We examine the relationship between collective country reputations and foreign stock returns following corporate scandal news. We find that investors punish not only a focal scandalous foreign firm but also other foreign firms from the same country, especially those from more trustworthy countries. The effect is stronger for firms with more imperfect information, measured by higher information asymmetry, lower reporting quality, and higher bankruptcy risk. Our findings suggest that investors incorporate a trust premium into stock prices based on foreign firms’ countries of origin. However, they withhold that premium when a country’s trustworthiness is compromised by its affinity firm’s misconduct.

Keywords: Collective reputation, country trustworthiness, trust premium, corporate misconduct, imperfect information

JEL Classification: G12, G14, G15, G33, G41, L14, M14, Z10

Suggested Citation

Chan, Konan and Kong, De-Rong and Lin, Tse-Chun, Collective Reputations, the Trust Premium, and Corporate Misconduct (June 25, 2021). Available at SSRN: https://ssrn.com/abstract=3874545 or http://dx.doi.org/10.2139/ssrn.3874545

Konan Chan (Contact Author)

National Chengchi Unversity (NCCU) - Finance ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

De-Rong Kong

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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