Collective Reputations, the Trust Premium, and Corporate Misconduct

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