Do Corporate Ethics Enhance Financial Analysts’ Behavior and Performance?

Abstract

This study investigates the relationship between corporate ethics and the information intermediation element of public companies’ information environment. Drawing on the well-established virtue, deontological, and consequential ethical theories, we predict that higher corporate ethics standards have a positive effect on financial analysts’ behavior and earnings forecasts. Using a sample of 5276 firm-year observations from 780 publicly listed US companies, multivariate regression analyses document a significant positive association between company’s level of ethical commitment and analyst coverage and forecast accuracy. Furthermore, the results show that firms with fewer incidents of ethical misconduct are associated with higher analyst consensus. These findings hold across a battery of robustness tests and indicate that a firm’s ethical commitment enhances its corporate information environment and allows financial analysts to play a more effective intermediary role in capital markets.