Corporate integrity culture and the cost of equity capital

Purpose This study investigates the relationship between corporate integrity culture and the cost of equity capital. Design/methodology/approach Using firm-level integrity culture data developed by Li et al. (2021), we find a significant negative association between corporate integrity culture and the cost of equity capital. We estimate an ordinary least squares regression model to investigate the relationship between corporate integrity culture and the implied cost of equity. Findings Our analysis reveals that corporate integrity culture reduces the cost of equity capital by mitigating the risk of accounting malfeasance. These findings remain after addressing potential endogeneity concerns. Originality/value This study makes several important contributions to the literature. First, it is the first to empirically investigate whether corporate integrity culture enhances firm value by reducing the cost of equity capital and establishing a previously unexplored mechanism. Second, this study contributes to the existing literature on factors affecting the cost of equity capital by identifying integrity culture as a key factor and emphasizing the role of accounting malfeasance risk as a channel through which it influences the cost of equity capital. Third, using firm-level integrity culture data, this study addresses gaps in the finance and accounting literature, where integrity culture has received limited attention despite its significance. Using firm-level data enables a more precise and nuanced analysis, overcoming the limitations of traditional proxies such as surveys or regional religious measures. This research broadens the understanding of how corporate integrity culture shapes financial outcomes and provides valuable insights for both academic and practical applications.