Collective Reputations, Trust Premium, and Corporate Misconduct
60 Pages Posted: 9 Jul 2021
Date Written: June 25, 2021
We examine the relationship between collective country reputations and foreign stock returns following news of corporate scandals. We find that investors punish not only the scandalous foreign firm but also other firms from the same country of origin, especially those coming from more trustworthy countries. The effect is more salient for firms with more imperfect information as 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’ country-of-origin. However, they reclaim such a premium when a country’s trustworthiness is compromised by its affinity firm’s misconduct. Overall, we provide novel evidence that collective country reputations affect the pricing of foreign firms listed on the U.S. stock market.
Keywords: Collective reputation, country trustworthiness, trust premium, corporate misconduct, imperfect information
JEL Classification: G12, G14, G15, G33, G41, L14, M14, Z10
Suggested Citation: Suggested Citation