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The Price of Trust: How CEO Behavioral Integrity Shapes the Cost of Equity Capital

Author

Listed:
  • Hao Sun
  • Yuki Gong
  • Sing Lui So
  • Willa Li

Abstract

This study examines the relationship between CEO behavioral integrity (BI)—defined as the consistency between a leader's words and actions—and a firm's implied cost of equity capital (COEC). Drawing on the managerial style literature, we conceptualize BI as a distinct, communication‐based trait that reflects the credibility of executive decision‐making. Using textual analysis, we construct a proxy for CEO BI from the causal and explanatory language contained in shareholder letters of S&P 500 firms between 2013 and 2018. The results reveal a significant negative association between CEO BI and COEC across seven alternative measures. This relation remains robust after addressing endogeneity through both a CEO‐turnover falsification test and an instrumental‐variable approach based on peer‐industry BI. The effect is more pronounced when the information environment is less transparent, firm‐level risk is higher, and CEOs possess greater power. Further analysis indicates that aggressive earnings management and lower accounting quality mediate the effect, suggesting that BI operates through information‐risk channels. Overall, the findings show that shareholders demand a higher risk premium and incur greater monitoring costs when CEOs exhibit low behavioral integrity, underscoring the market's valuation of managerial credibility as a priced governance attribute.

Suggested Citation

  • Hao Sun & Yuki Gong & Sing Lui So & Willa Li, 2026. "The Price of Trust: How CEO Behavioral Integrity Shapes the Cost of Equity Capital," International Review of Finance, International Review of Finance Ltd., vol. 26(1), March.
    • Handle: RePEc:bla:irvfin:v:26:y:2026:i:1:n:e70060
    DOI: 10.1111/irfi.70060
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