The Price of Integrity

73 Pages Posted: 23 Jan 2018 Last revised: 21 Aug 2021

See all articles by Chen Chen

Chen Chen

Monash University - Department of Accounting

Ying Xia

Monash University - Monash Business School

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: July 29, 2021

Abstract

This paper examines the effect of integrity culture on firms’ financing costs. Using different integrity measures at both firm and regional levels, we find that firms with a lower integrity level or firms located in regions lacking integrity have a higher bank loan spread and higher implied cost of equity. To address endogeneity, we adopt forced CEO turnovers due to personal indiscretions and Massachusetts’ Alimony Reform Law of 2011 as two exogenous shocks to firms’ integrity culture. We further identify accounting information quality and excessive risk taking as two channels through which integrity culture affects financing costs.

Keywords: Integrity, Corporate culture, Bank loan spread, Implied cost of equity capital

JEL Classification: M14, G21, G12, G30

Suggested Citation

Chen, Chen and Xia, Ying and Zhang, Bohui, The Price of Integrity (July 29, 2021). Available at SSRN: https://ssrn.com/abstract=3107405 or http://dx.doi.org/10.2139/ssrn.3107405

Chen Chen

Monash University - Department of Accounting ( email )

Building H, Level 3
Caulfield campus
Melbourne, Victoria 3800
Australia

Ying Xia (Contact Author)

Monash University - Monash Business School ( email )

900 Dandenong Road
Caulfield Campus
Melbourne, Victoria 3145
Australia

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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