Back of the Envelope

Observations on the Theory and Empirics of Mathematical Finance

[WP] Are investors ethics agnostic?

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My colleague, an FPM and I have a new paper looking at whether stock investors care about ethical behavior on part of top management. We use the 2013 IPL match-fixing scandal surrounding Chennai Super Kings (owned by India Cements Limited) to study this issue. Here is the abstract:

In this paper we ask if the perception investors have regarding ethical nature of the management per se influences their action. In order to check for rent seeking behaviour that could arise when there is negative perception regarding ethics, we look a single company‟s management whose actions – though not related to the performance of the company – have led to doubts regarding its ethical nature. Using event study mechanism, we find that when the action leads to a positive outcome for the company, the investors’ reaction is statistically insignificant. However, when another action did not lead to any potential positive outcome, the abnormal returns associated with the company’s stock are negative and significant. Therefore, it is possible that unethical practices, even if unrelated to company’s performance, lead to lesser trust regarding the company, thereby reducing the stock prices, which suggests rent seeking behaviour.

As always, comments welcome.

Update: Some press coverage here.

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Written by Vineet

April 3, 2015 at 7:29 pm

Posted in Research

Tagged with , , ,

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