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Which Firms Get Punished for Unethical Behavior? Explaining Variation in Stock Market Reactions to Corporate Misconduct

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  • Carberry, Edward J.
  • Engelen, Peter-Jan
  • Van Essen, Marc

Abstract

Although there is ample evidence that stock markets react negatively to unethical corporate behavior, our understanding of the mechanisms that shape variation in these reactions across different incidents of misconduct remains underdeveloped. We propose and test a framework for explaining this variation by focusing on the role of the media in disseminating initial information about misconduct. We argue that the signaling effects of this information are important for investors because corporations have strong incentives to limit the information they disclose about misconduct. More specifically, we hypothesize that investors are more likely to react negatively when the media presents clear and credible information that misconduct occurred, that the firm was responsible for it, and that the misconduct was the result of deeper organizational problems. We also predict that information which signals that a firm has restorative capacity tempers investor reactions when the media places blame for misconduct on the corporation rather than specific individuals. We test our hypotheses in a unique sample of 345 acts of corporate misconduct in five European countries. Our findings provide broad support for our hypotheses, and we discuss implications for research on corporate misconduct and the role of non-state actors in regulating unethical corporate behavior.

Suggested Citation

  • Carberry, Edward J. & Engelen, Peter-Jan & Van Essen, Marc, 2018. "Which Firms Get Punished for Unethical Behavior? Explaining Variation in Stock Market Reactions to Corporate Misconduct," Business Ethics Quarterly, Cambridge University Press, vol. 28(2), pages 119-151, April.
  • Handle: RePEc:cup:buetqu:v:28:y:2018:i:02:p:119-151_00
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    20. Laure Batz, 2023. "Financial market enforcement in France," European Journal of Law and Economics, Springer, vol. 55(3), pages 409-468, June.
    21. Barkemeyer, Ralf & Faugère, Christophe & Gergaud, Olivier & Preuss, Lutz, 2020. "Media attention to large-scale corporate scandals: Hype and boredom in the age of social media," Journal of Business Research, Elsevier, vol. 109(C), pages 385-398.
    22. Federica Nieri & Priscilla Rodriguez & Luciano Ciravegna, 2023. "Corporate misconduct in GVCs: challenges and potential avenues for MNEs," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 50(1), pages 193-207, March.
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