Researchers at Clemson University, along with researchers at Auburn, have found that investors really hate it when companies talk about being good – i.e., “virtue signaling” – but don’t follow it up with good action.
That is, of course, unless they think the money will flow again later.
It’s called the “hypocrisy penalty,” and it’s what happens when a company gets caught doing something unethical despite presenting a virtuous image, regardless of whether that virtue is more conservative or progressive.
According to a study published Thursday in the Journal of Management, investors often sharply penalize virtue-signaling companies that don’t live up to their words.
The study looked at more than a half-million news reports of unethical behavior in mostly publicly traded companies – reports of sexual misconduct, employee mistreatment, and the like – then looked at how the stock market reacted following those reports.
The researchers found that the average company caught being hypocrites in investors’ eyes lost about a half-billion dollars in value in just a few days, and as much as 1.5% of share values overnight.
“Stated simply,” wrote Clemson entrepreneurship professor Lori Trudell, one of the authors of the study, in a web posting, “bad things happen, and when they do the stock market will clobber those who do not seem to be walking their talk.”
The study found that the economic hit was far less on companies that did not present a virtuous or socially conscious image of themselves.
One caveat: The researchers also found that the hypocrisy penalty did not hold up where anticipated good money was expected again later. If investors anticipate that a company will perform well in the future, there was no perceived hypocrisy penalty and the consequences of misconduct are the same for those that use virtue signaling and those that do not.
“Apparently, shareholders are very concerned about executives who say one thing and do another,” wrote Trudell and Auburn Professor Brian Connelly, “unless the company is expected to make lots of money, in which case there is little or no penalty for unethical behavior.”
