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Corporate Reputation’s Invisible Hand: Bribery, Rational Choice, and Market Penalties

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Abstract

Drawing upon rational choice and investor attention theories, we examine how accusations of corporate bribery and subsequent investigations shape market reactions. Using event study methodology to measure loss in firm value for public firms facing bribery investigations from 1978 to 2010, we found that total market penalties amounted to $60.61 billion. We ran moderated multiple regression analysis to examine further the degree to which the unique characteristics of bribery explain variations in market penalties. Companies committing bribery in less corrupt host countries and with the involvement of compromised executives experienced greater market penalties than did other companies. After partitioning share value losses into components for regulatory penalties, class action settlements, and loss to reputation, we found that reputational penalties account for 81.8¢ of every dollar of share value loss. Omission of reputational penalties in rational choice calculus underestimates bribery costs by 4.5 times. The results suggest that firms should not underestimate the importance of market-imposed reputational penalties by merely considering regulator-imposed fines and sanctions.

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Acknowledgments

We gratefully acknowledge feedback from an earlier draft of this manuscript presented during the 2011 Academy of Management Conference. We thank Masako Darrough, Suresh Govindaraj, Lilac Nachum, Nafis Rahman and Stone Shi for their invaluable feedback while reviewing earlier versions of this paper. Support for this project was provided by a PSC-CUNY Award, jointly funded by The Professional Staff Congress and The City University of New York.

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Authors and Affiliations

  1. John Jay College of Criminal Justice, City U. of New York, 524 W59th Street, 53341 Haaren Hall, New York, NY, 10019, USA

    Vijay S. Sampath

  2. Baruch College, City U. of New York, One Bernard Baruch Way, Box B9-240, New York, NY, 10010, USA

    Naomi A. Gardberg

  3. Lubin School of Business, Pace University, One Pace Plaza, W-465, New York, NY, 10038, USA

    Noushi Rahman

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  1. Vijay S. Sampath
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Correspondence to Vijay S. Sampath.

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Sampath, V.S., Gardberg, N.A. & Rahman, N. Corporate Reputation’s Invisible Hand: Bribery, Rational Choice, and Market Penalties. J Bus Ethics 151, 743–760 (2018). https://doi.org/10.1007/s10551-016-3242-3

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