Market or Morality - Follow an Unethical Action for the Management?

¹ Lars Engstfeld is a graduate economist from the University of Wuppertal and works as a controller for the OBI Group Holding SE & Co. KGaA
² Prof. Dr. Martin Užík earned his PhD and Habilitation at the University of Wuppertal and holds a professorship in the field of finance at the Berlin School of Economics and Law
³ Sebastian Block LL.M. is a doctoral student at the Technical University Košice and works as a research associate at the Berlin School of Economics and Law

^* Corresponding author: martin.uzik@hwr-berlin.de

Abstract

Research background: With countless standards and rankings for moral behavior of large companies on one side and corporate scandals of immoral actions on the other, the question arises whether it is important at all for stock corporations to keep a clean slate or whether their value might not even be affected by emerging scandals.

Purpose of the article: This paper analyzes whether and how the stock market reacts to newly published news about immoral behavior by stock corporations. It shows the reactions of stock prices to morality scandals for 39 different companies that have all been exposed for immoral behavior.

Methods: After establishing a standard time window around the event day of the emerging news, the stock reaction is analyzed by estimating the selected companies’ share prices based on their past and then comparing the estimated values to the actual values on and after the event day.

Findings & Value added: While the overall finding is that stock prices do not react to their companies’ scandals with statistical significance, it is shown that the stock prices of smaller companies are affected more than those of the bigger example companies. It can therefore still be recommended for companies to build a good reputation by showing responsible behavior.