Corporate ethical lapses: do markets and stakeholders care?

Abstract

Purpose The purpose of this paper is to assess if a firm’s ethical lapses, which result from unethical behavior or actions, influence its social disclosure (SD) practices as well as how ethical lapses affect both the firm’s legitimacy within society and its standing in financial markets. This study addresses two-related questions: do a firm’s ethical lapses undermine the credibility of its SD in financial markets, either directly or through a firm’s legitimacy? Do ethical lapses affect a firm’s market value and is this effect mediated by SD and legitimacy? Design/methodology/approach Three hypotheses are derived based on two theoretical approaches, information economics and institutional theory. The hypotheses lead ultimately to an examination of a firm’s legitimacy. Ethical lapses are inspired by the Global Reporting Initiative grid and by ISO 26000. Findings The results suggest that a firm’s ethical lapses underlie its SD practices and affect its legitimacy and standing in financial markets, the latter being proxied by financial analysts’ forecasts. Research limitations/implications The limitations of this study include that alternative ways exist to measure the constructs employed, the measurement of SD is subject to discretionary choices, and the North American sample results may not be generalizable to other countries. Originality/value The originality and contributions of this study are based on the use of information economics and institutional theory in a complementary way that recognizes information as serving various purposes and constituencies. Additionally, the paper extends prior research on the SD aspects of CSR by showing it matters to both financial markets and non-financial stakeholders.