AbstractWe show that social capital has a strong mitigating effect on financial adviser misconduct in the United States. Moreover, advisers who have committed misconduct are also more likely to relocate to counties with a relatively lower level of social capital than that of his previously residing county. These findings provide support for both the deterrence and displacement effects of social capital on financial adviser misconduct, and are robust to tests that address potential endogeneity concerns. Our results shed new light on (...) social capital as an informal governing and monitoring mechanism against individual unethical behavior. (shrink)

We study whether greater social trust is associated with a lower incidence of corporate misconduct. Both social norm and network theory suggest that social trust can affect managerial behavior and reduce the likelihood of misconduct behavior. Consistent with this prediction, we find that social trust is negatively associated with corporate misconduct behavior. Moreover, we show that, when media coverage is higher, the negative relation between social trust and corporate misconduct behavior is more pronounced. Further analyses suggest that social trust can (...) help mitigate both disclosure-related and nondisclosure-related misconduct. (shrink)

We study the impact of social capital and perceptions about corporate ethical behaviour on the use of collateral in corporate borrowing. Using a dataset of more than 17,500 firms operating in over 100 transition and developing countries, we find evidence that country-level social capital and better perceptions about corporate ethical behaviour are negatively associated with the likelihood to pledge collateral. In addition, these country-level characteristics influence the value of collateral relative to the loan value.

We investigate whether air pollution harms business ethics from the perspective of earnings manipulation, which exerts a real effect on the economy and social welfare. Using a large sample and a comprehensive air quality index in China, we find that firms located in cities with more severe air pollution exhibit higher levels of discretionary accruals and are more likely to restate their financial statements, consistent with exposure to air pollution leading to more earnings manipulation. We further provide causal evidence using (...) propensity score matching and a discontinuity regression design exploiting the Qinling Mountain–Huai River Heating Policy Line, which exogenously leads to more air pollution to cities located immediately north of the Line but not those in the south. Our findings are robust to controlling for weather conditions and alternative samples and measures of air pollution and earnings manipulation. Overall, this study unveils how the ecological environment shapes business ethics. (shrink)

Interest in the drivers of firms’ corporate social responsibility (CSR) is growing. However, little is known about the influence of a CEO’s childhood experience of natural disasters on CSR. Using archival data, we explore this relationship by offering three mechanisms that may account for how the CEO’s childhood experience of natural disaster is related to their CSR. More specifically, while prior research has established a positive relationship based on the post-traumatic growth theory, we show that the dual mechanisms of prosocial (...) values and a CEO’s risk aversion explain the positive relationship. We further find that the positive relationship is stronger (1) when CEOs have longer career horizons and (2) when community social capital is high. This study contributes to both research and managerial implications on the topics of CEO’s childhood experience and CSR. In particular, this study advances the upper echelon theory by revealing that a CEO’s childhood experience of natural disaster is a useful yet relatively underexplored variable that can help explain the substantial variations in firms’ CSR. Moreover, we emphasize that a CEO’s career horizons and level of community social capital are important variables that further amplify the effect of a CEO’s childhood experience of natural disaster on the firm’s CSR commitment. (shrink)

This study examines the impact of trust and a national culture of secretiveness on the number of bank relationships per firm. We hypothesize that the degree of openness of a firm and trust between economic agents may influence the willingness of the firm to release sensitive information to its lenders, as well as the decision between maintaining single or multiple bank relationships. Using a sample of over 8000 non-financial firms operating in 12 countries from the eurozone we provide evidence that (...) a national culture of secrecy enhances the number of bank relationships, while trust has the opposite effect. Results are robust to the use of various estimation techniques, alternative definitions of secrecy and trust, controls for firm-level and country-level characteristics, and instrumental variables. The main implication of this finding is that the financial decisions of firms cannot be effectively examined without considering deep-rooted national cultural elements. We also find that the results are mainly driven by small and medium enterprises, implying that the higher informational opaqueness of these firms enhances the role of secrecy and trust. (shrink)

This paper investigates whether managerial rhetoric in the Management Discussion and Analysis section of 10-K filings can help gauge the level of managerial opportunism in a firm. We find that the use of trust-related words is connected to inefficient investment decisions and poor operating performance. Furthermore, firms making more frequent use of trust-related words are subject to less monitoring by institutional investors or analysts. Their accounting also relies more heavily on discretionary accruals. These results are consistent with the notion that (...) managerial rhetoric to advertise trustworthiness points towards agency problems plaguing the firm. (shrink)