Collective reputations, the trust premium, and corporate misconduct

Abstract

We investigate how collective reputations influence foreign stock prices after outbreaks of corporate misconduct. We find that investors in the U.S. stock market penalize not only misconduct firms but also other foreign firms from the same country, especially among those from more trustworthy countries. The effect is more pronounced for foreign firms facing greater informational frictions, such as severe information asymmetry and weaker financial credibility, or operating in weaker institutional environments. Our findings suggest that the investors factor in a “trust premium” of foreign stocks, but they withdraw this premium when a country’s trustworthiness is compromised by its affinity firm’s misconduct.