Investigating the weak managers' ethical behaviours on stock price crash risk and the financial reporting quality

Document Type : Research Paper

Authors

Department of Accounting, University of Mazandaran, Babolsar, Iran

Abstract

Changes in stock prices in the market are considered normal; but, the issue that always worries investors is the issue of sudden changes in stock prices. Also, one of the major sources of information used by capital market participants is the financial reports published by the companies, periodically made available to the public as the basis for the potential and actual investor decisions to buy and sell and invest in the stock market. Therefore, the ethical behaviour of managers in the organisation is considered as a key factor in the success of the organisation and gaining the trust of investors. Therefore, based on this argument, the purpose of this study is to design a model to examine the weak managers' ethical behaviours on stock price crash risk and financial reporting quality using a sample of 134 companies listed on the Tehran Stock Exchange from 2018 to 2020. Also, the research hypotheses test was conducted using structural equation modelling. The results showed that the weak ethical behaviours of managers in the companies increase stock price crash risk. The second hypothesis also shows that the weak managers' ethical behaviours also reduce financial reporting quality

Keywords

[1] H. Abbas Zadeh, Ethics in organizations with emphasis on the Islamic perspective, Tadbir 157 (2006), 14–16.
[2] Sh. Alimi and M. Gerkaz, The effect of psychological characteristics of self-deception and professional skepticism on ethical perception in the selection of earnings management methods, Manag. Account. 13 (2020), no. 44, 179–192.
[3] P.C. Andreou, C. Antoniou, J. Horton and C. Louca, Corporate governance and firm-specific stock price crashes, 2013, Available At URL: Http://www.ssrn.com.
[4] J.L. Callen and X. Fang, Institutional investor stability and crash risk: Monitoring or expropriation?, J. Bank. Finance 37 (2013), no. 8, 3047–3063.
[5] C. Cao, C. Xia and K.C. Chan, Social trust and stock price crash risk: Evidence from China, Int. Rev. Econ. Finance 46 (2016), 148–165.
[6] H. Dargah and S.Gh. Sadat Tehrani, The relationship between management ethics and organizational commitment among employees of the Tehran University of Medical Sciences, Iran. J. Med. Ethics History Med. 7 (2014), no. 1, 43–52.
[7] P. Dechow and I. Dichev, The quality of accruals and earnings: The role of accruals in estimation errors, Account. Rev. 77 (2002), 35–59.
[8] R.T. De George, Business ethics, Simon and Schuster, Upper Saddle River, NJ, 1999.
[9] M. Ebrazi and M. Yazdanshenas, Social responsibility and work ethics in new quality management, J. Organ. Culture Manag. 5 (2007), no. 1.
[10] W. ElGammal, A.N. El-Kassar and L. Messarra, Corporate ethics, governance and social responsibility in MENA countries, Manag. Decision 56 (2018), no. 1, 273–291.
[11] R.Z. Elias, The Effect of corporate ethical values on perceptions of earnings management, Manag. Audit. J. 19 (2004), no. 1, 84–98.
[12] H. Etemadi and Z. Dianti Deilami, The effect of ethical perspective of financial managers on the corporate financial reporting quality, J. Ethics Sci. Technol. 1 (2009), no. 2, 11–20.
[13] O.C. Ferrell, D.E. Harrison, L.H. Ferrell and F. Joe, Business ethics, corporate social responsibility, and brand attitudes: An exploratory study, J. Bus. Res. 65 (2019), 491–501.
[14] A. Ghadiri Moghaddam, M. Shahrestani, Z. Hamrah and S. Tahereh Mehranbanklou, The relationship between managers´ ethical values and conflict management strategies: Evidence from Tehran Stock Exchange, Interdisciplinary J. Contemp. Res. Bus. 4 (2013), no. 12, 35–42.
[15] A.P. Hutton, A.J. Marcus and H. Tehranian, Opaque financial reports, R2, and crash risk, J. Financ. Econ. 94 (2009), 67–86.
[16] S.D. Hunt, V.R. Wood and L.B. Chonko, Corporate ethical values and organizational commitment in marketing, J. Market. 53 (1989), 79–90.
[17] J. Henseler, C.M. Ringle and R. Sinkovics, The use of partial least squares path modeling in international marketing. New challenges to international marketing, Adv. Int.Market. 20 (2009), 277–319.
[18] N. Imamah, T. Lin Suhadak, S. Handayani and J. Hua Hung, Islamic law, corporate governance, growth opportunities and dividend policy in Indonesia Stock Market, Pacific-Basin Finance J. 55 (2019), 110–126.
[19] S.C. Jinseok, J. Yuhyung Shin and K. Min Soo, How does corporate ethics contribute to firm financial performance?The mediating role of collective organizational commitment and organizational citizenship behavior, J. Manag. 23 (2013), no. 8.
[20] J. Jones, Earnings management during import relief investigations, J. Account. Res. 29 (1991), 93–228.
[21] Sh. Khajavi, A. Sarmadinia and A. Pourgoudarzi, Conceptual framework based on ethics for financial accounting and reporting, Financ. Account. Knowledge 7 (2020), no. 1, 25–44.
[22] J.B. Kim, Y. Li and L. Zhang, Corporate tax avoidance and stock price crash risk: Firm-level analysis, J. Financ. Econ. 100 (2011b), 639–662.
[23] W. Li and G. Cai, Religion and stock price crash risk: Evidence from China, China J. Account. Res. 9 (2016), no. 3, 235–250.
[24] X. Li, S.S. Wang and X. Wang, Trust and stock price crash risk: Evidence from China, J. Bank. Finance 76 (2017), 74–91.
[25] E.V. Lopez and A. Medina, Influence of ethical behaviors in corporate governance, Int. J. Manag. Projects Bus. 8 (2015), no. 3, 586–611.
[26] D.R. Martin, G.R. Aldhizer, J.L. Campbell and T.A. Baker, When earnings management becomes fraud, Int. Audit. 17 (2002), 14–21.
[27] M. Mohammadi and M. Mazaheri, Investigating the relationship between ethics in accounting and execution of social responsibilities in listed companies in Tehran Stock Exchange, Account. Manag. Perspectives 2 (2019), no. 7, 1–19.
[28] F. Nakpodia and E. Adegbite, Corporate governance and elites, Account. Forum 42 (2018), no. 1, 17–31.
[29] M. Mc Nichols, Research design issues in earnings management studies, J. Account. Public Policy 19 (2002), 313–345.
[30] M. Nurul Houqe, T. Van Zijl and K.K. Dunstan, Corporate ethics and auditor choice: International evidence, Res. Account. Regul. 27 (2015), no. 1, 57–65.
[31] W.U. Parfet, Accounting subjectivity and earnings management: A preparer perspective, Account. Horizons 14 (2000), no. 4, 481–488.
[32] Y. Rezaei Pite Noei, M. Safari Garaili and M. Norouzi, Social trust, external monitoring and stock price crash risk: Alternative and complementary theory test, Account. Audit. Rev. 24 (2017), no. 3, 349–370.
[33] S.L. Robinson and R.J. Bennett, A Typology of deviant workplace behaviors: A multidimensional scaling study, Acad. Manag. J. 38 (1995), no. 2, 555–572.
[34] R. Royaei and A. Bayat, Ethics Education in accounting: A study of the impact of ethical motivation on ethical behavior, Account. Res. 3 (2011), no. 9, 1–24.
[35] T. Salehi, Investigating the relationship between corporate governance mechanisms and ethical decision making of internal auditors and the impact of experience on it, Quart. J. Ethics Sci. Technol. 1 (2020), no. 13, 18–26.
[36] A. Salin, Z. Ismail, M. Smith and A. Nawawi, The influence of a board’s ethical commitment on corporate governance in enhancing a company’s corporate performance, J. Financ. Crime 26 (2019), no. 2, 496–518.
[37] N. Sarlak, Accounting ethics, Quart. J. Ethics Sci. Technol. 3 (2008), no. 1-2.
[38] R.L. Sims and J.P. Keenan, Predictors of external whistleblowing: Organizational and intrapersonal variables, J. Bus. Ethics 17 (1998), no. 4, 411–421.
[39] H. Taghizadeh and Gh. Soltani Fasqandis, The effect of business ethics on corporate social responsibility, Ethics Sci. Technol. 3-4 (2010), 94–104.
[40] M. Tanani, A. Seddighi and A. Amiri, Investigating the role of some corporate governance mechanisms in reducing the risk of stock prices crash of the companies listed in the Tehran Stock Exchange, Asset Manag. Financ. 3 (2015), no. 4, 31–50.
[41] L.K. Trevino, K.D. Butterfield and D.L. McCabe, The ethical context in organizations: Influences on employee attitudes and behaviors, Bus. Ethics Quart. 8 (1998), no. 3, 447–76.
[42] S. Valentine and T. Barnett, Ethics codes and sales professionals’ perceptions of their organizations’ ethical values, J. Bus. Ethics 40 (2002), 191–200.
[43] S. Valentine, K. Young, L. Bailey, N. Barhoum, G.N. La Bure and P. Isaac, Expressing organizational dissent: The role of ethical ideology and corporate ethical values, J. Bus. Strateg. 18 (2001), 71–89.
[44] S.J. Vitell, A. Bakir, J.G.P. Paolillo, E.R. Hidalgo, J. Al- Khatib and M.Y.A. Rawwas, Ethical judgments and intentions: A multinational study of marketing professionals, Bus. Ethics: Eur. Rev. 12 (2003), no. 2, 151–171.
[45] N. Waweru, Business ethics disclosure and corporate governance in Sub-Saharan Africa (SSA), Int. J. Account. Inf. Manag. 28 (2020), no. 2, 363–387.
Volume 13, Issue 2
July 2022
Pages 535-547
  • Receive Date: 16 April 2021
  • Revise Date: 25 May 2021
  • Accept Date: 30 June 2021