DO INVESTORS PUNISH MORAL LAPSES? - AN EMPIRICAL TESTING ON THE LINKAGES BETWEEN MORAL LAPSES AND SHARE PRICE RETURNS OF SELECTED COMPANIES.
Dr. Rengasamy Elango
Majan College (University College),
Muscat, Sultanate of Oman
This study examines whether investors punish moral lapses of the company management that violated various established code of conduct and regulations. I further examine whether the moral lapses of the corporate leaders have had any impact on the share price behavior and consequently the returns from the market. Testing for randomness and normality of share price behavior in response to the event announcements are the focal points of the study. The sample comprises fifteen companies. Two non-parametric tests, Kolmogorov Smirnov Test and Runs Test for Randomness and one parametric test, Auto-correlation test have been applied to analyze the data. The analytical results of Kolmogorov–Smirnov test indicate that except for two companies, the returns are normally distributed. The implication of this outcome is that the shareholders do not immediately offload their holdings even after coming to know of the moral lapses of corporate executives. The Runs test for Randomness accepted the null hypothesis that the successive or lagged price changes of the sample companies follow a random walk. The Auto-correlation computed for the market return series shows no significant auto-correlation at different lags for the sample companies except for two companies. This again confirms that investors do wait and watch even after the announcement or happening of unpleasant events/developments in their companies. The findings are quite relevant to the investing community as a whole who invest their hard-earned money on corporate undertakings expecting reasonable returns.
Key Words: Moral lapses, Market efficiency, Event-study, Runs test, Share price returns, Auto-correlation,
JEL Classification: G14, G15