Do companies make more money, or less, by behaving ethically?
Results suggest that ethical behaviour provides financial benefits to both companies and investors. It makes good financial sense for investors to prefer such companies.
Business ethics is a topic we often see in the news. Some of these stories describe corporations becoming more socially responsible. They reduce pollution or treat their employees better. Other stories instead highlight the latest corporate scandals.
But does ethical or unethical behaviour matter from a financial perspective? Do investors pay attention to such news, or only to financial results? And do the companies themselves make more money, or less, by behaving ethically?
These questions intrigued Associate Professor Jingyu Li. To answer them, she and her coauthors examined 541 multinational corporations over a three-year period. Their analysis looked at the companies’ ethical reputation, financial performance and stock market return. They used quarterly rankings from the Swiss-based Covalence Ethical Quote service to measure ethical reputation.
Li found that investors do react to ethics-related news. Changes in ethical rankings were generally followed by changes in stock prices. Share prices rose for companies with improving reputations and dropped for companies with decreasing reputations. Thus, investors earned better returns from the improving companies.
The companies benefited too. Improved ethical performance was accompanied by improved financial performance. The clarity of their financial reports also improved.
Li further found that shareholders expected good ethics by default from companies in which they invested. Interestingly, investors saw American firms as being less ethical than firms in other countries.
Overall, the results suggest that ethical behaviour provides financial benefits to both companies and investors. So it makes good financial sense for investors to prefer such companies.
Jingyu (Jennifer) Li is an Associate Professor of Accounting. Her other research examines the accounting of sale-leaseback agreements, environmental disclosures and management compensation. She received the 2015 Departmental Researcher of the Year Award within Accounting.
Fayez A. Elayan, Jingyu Li, Zhefeng Frank Liu, Thomas O. Meyer and Sandra Felton, 2016. Changes in the Covalence Ethical Quote, Financial Performance and Financial Reporting Quality. Journal of Business Ethics 134, 360-395.