Abstract
It is commonly assumed that corporations which conduct their business unethically destroy shareholder value. However, a review of the extant literature concerning the relationship between ethics, governance, and resulting share price performance proves inconclusive. Since the advent of the global financial crisis, the ethics and governance of corporations have been under intense scrutiny from market participants and other interested stakeholders.
This study applied event study methodology to incidents of announced ethical misconduct to investigate the impact on share prices of a sample of 30 JSE-listed companies. The event study was conducted using SENS announcements over a 10-year period from 2011 to 2020. The impact on the share prices of JSE-listed companies was examined over a 15-day event window.
The results of the event study reveal that there is a relationship between announcements of ethical misconduct and share prices. However, the share price reactions (measured in terms of abnormality of returns) were found to be statistically insignificant. The informational content of a misconduct announcement was found to be an important determinant of the extent of a share price’s reaction. The study’s findings provide valuable insight into market participants’ perceptions of ethics, corporate governance and their varying reactions to ‘bad’ news.
The study has implications for the JSE as both a regulator and stock exchange that seeks to retain and attract investment. It also has implications for the FSCA whose legal and regulatory powers may be better exercised to discourage and effectively punish misconduct incidents.
The main contribution of this research to the extant literature is the promotion of a deeper understanding of the specific elements of ethical misconduct that drive share price behaviour, particularly within South Africa’s capital market.”
Keywords: Agency theory; Business ethics; Corporate governance; Event study; JSE; Share prices