Collective Reputations, Trust Premium, and Corporate Misconduct

60 Pages Posted: 9 Jul 2021

See all articles by Konan Chan

Konan Chan

National Chengchi Unversity (NCCU) - Finance

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

De-Rong Kong

National Taiwan University - Department of Finance

Date Written: June 25, 2021

Abstract

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

Chan, Konan and Lin, Tse-Chun and Kong, De-Rong, Collective Reputations, 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)

Tse-Chun Lin

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

Pokfulam Road
Hong Kong
China

De-Rong Kong

National Taiwan University - Department of Finance ( email )

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

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