The Effect of Published Reports of Unethical Conduct on Stock Prices 1. Spuma M. Rao Brooke Hamilton III ABSTRACT. This study adds to the empirical evidence supporting a significant connection between ethics and profitability by examining the connection between published reports of unethical behaviour by publicly traded U.S. and multinational firms and the performance of their stock. Using reports of unethical behaviour published in the Wall Street Journal from 1989 to 1993, the analysis shows that the actual stock performance for those companies was lower than the expected market adjusted returns. Unethical conduct by firms which is discovered and publicized does impact on the shareholders by lowering the value of their stock for an appreciable period of time. Whatever their views on whether ethical behaviour is profitable, managers should be able to see a definite connection between unethical behaviour and the worth of their firm's stock. Stockholders, the press and regulators should find this information important in pressing for greater corporate and managerial accountability. Dr. Spuma M. Rao is Associate Professor of Finance, College of Business Administration, University of Southwestern Louisiana. His publications appear in such journals as Global Finance, American Business Review, Financial and Strategic Decision Making, Business and Economic Review, The Appraisal. J. Brooke Hamilton III is Assistant Professor in the Department of Management, University of Southwestern Louisiana. He was head of the Philosophy Department at Tuskegee Institute, spent 14 years in industry and returned to academe after completing his M.B.A. His work appears in the Journal of Business Ethics, Southeastern Journal of Legal Studies in business, and the proceeding of the Southern and Southwestern Marketing Associations. Introduction The question of whether there is any causal link between a company's ethical or unethical behaviour and its bottom line is an important one. There is always the cynic's view that ethics has no place in business and that businesses only need to appear ethical to succeed (Carr, 1968). The current political adage that those who play by rules should not be penalized refers to the nagging doubt that those who are ethical are at a disadvantage and are increasingly liable to get edged out by those who bend the rules (Garvin, 1986). Some may argue the virtue is its own reward no matter the level of social misfortune and societal derision which accompanies it but most business practitioners would prefer to believe that ethical actions make good economic sense and that virtue will have good conse- quences (Goodpaster and Matthews, 1982). A poll of self-selected readers of Nation's business (1993) showed 86% believed that ethical behaviour and integrity in a company are very important to its financial success, with 11% rating it somewhat important and only 3% rating ethics of little or no importance to financial success. The popular and business press, after heralding the closing of the 1980's as the end of the era of greed, has continued to report on the connec- tion between company profits and their efforts at "green Marketing" and other socially responsible activities. The Council on Economic Priorities and other consumer watchdog groups are rewarding good activities and putting the heat on bad actors through annual awards and press conferences (Newsweek, 1991). The answer to whether ethical behaviour affects a firm's financial standing cannot be a Journal of Business Ethics 15: 1321-1330, 1996. © 1996 Kluwer Academic Publishers. Printed in the Netherlands.