Ethical Behavior Perceptions and the Cost of Bank Equity: International Evidence

Abstract

We use a sample of banking institutions across 57 countries to investigate the relationship between country-level perceptions of corporate ethical behavior and the cost of bank equity. We find evidence that banks operate with lower costs of equity in countries with higher corporate ethical behavior ratings. This finding is robust to the inclusion of several bank-level and country-level control variables in the regressions, the use of alternative calculations for the cost of bank equity and endogeneity concerns, and the use of alternative regression techniques. Further analysis reveals that ethical behavior decreases the cost of equity more in countries with weak investor protection. This finding suggests that ethical behavior becomes more important in environments where investors are weakly protected against managerial opportunism through formal institutions.

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