Table 6 Corporate integrity culture and...

Table 6

Corporate integrity culture and the implied cost of equity capital: An instrumental variable approach

	Corporate integrity	ICC	Corporate integrity dummy	ICC
	(1)	(2)	(3)	(4)
Distance to religious sites	−0.052***		−0.022***
Distance to religious sites	(−3.084)		(−2.921)
$\hat{C o r p o r a t e I n t e g r i t y}$		−0.026**
$\hat{C o r p o r a t e I n t e g r i t y}$		(−2.565)
$\hat{C o r p o r a t e I n t e g r i t y D u m m y}$				−0.156**
$\hat{C o r p o r a t e I n t e g r i t y D u m m y}$				(−2.565)
Beta value-weighted	−0.105***	0.191*	−0.043***	0.583**
Beta value-weighted	(−7.743)	(1.705)	(−6.795)	(2.228)
Idiosyncratic risk	0.507***	2.107***	0.127***	2.779***
Idiosyncratic risk	(8.960)	(3.926)	(5.315)	(3.509)
Market value of equity	0.075***	−0.203**	0.018***	−0.125
Market value of equity	(12.001)	(−1.987)	(6.819)	(−0.949)
Market-to-book	0.005***	−0.019***	0.002**	−0.002
Market-to-book	(2.947)	(−2.876)	(2.485)	(−0.172)
Book leverage	−0.134***	1.362***	−0.067***	0.671
Book leverage	(−3.091)	(6.702)	(−3.339)	(1.626)
Momentum	−0.096***	−0.555***	−0.032***	−0.811***
Momentum	(−5.300)	(−5.329)	(−3.919)	(−4.060)
Analyst forecast dispersion	−0.001	−0.053	0.013	0.152
Analyst forecast dispersion	(−0.044)	(−0.713)	(1.116)	(1.382)
Long-term growth rate	−0.037	1.641***	0.025	2.122***
Long-term growth rate	(−0.495)	(6.305)	(0.687)	(7.972)
Return on assets	−0.414***	−2.633***	−0.170***	−4.218***
Return on assets	(−3.941)	(−4.804)	(−3.464)	(−3.809)
Year fixed effects	Yes	Yes	Yes	Yes
Industry fixed effects	Yes	No	Yes	No
Firm fixed effects	No	Yes	No	Yes
Observations	17,910	17,910	17,910	17,910
Adjusted R²	0.869	0.629	0.275	0.629

	Corporate integrity	ICC	Corporate integrity dummy	ICC
	(1)	(2)	(3)	(4)
Distance to religious sites	−0.052***		−0.022***
Distance to religious sites	(−3.084)		(−2.921)
$\hat{C o r p o r a t e I n t e g r i t y}$		−0.026**
$\hat{C o r p o r a t e I n t e g r i t y}$		(−2.565)
$\hat{C o r p o r a t e I n t e g r i t y D u m m y}$				−0.156**
$\hat{C o r p o r a t e I n t e g r i t y D u m m y}$				(−2.565)
Beta value-weighted	−0.105***	0.191*	−0.043***	0.583**
Beta value-weighted	(−7.743)	(1.705)	(−6.795)	(2.228)
Idiosyncratic risk	0.507***	2.107***	0.127***	2.779***
Idiosyncratic risk	(8.960)	(3.926)	(5.315)	(3.509)
Market value of equity	0.075***	−0.203**	0.018***	−0.125
Market value of equity	(12.001)	(−1.987)	(6.819)	(−0.949)
Market-to-book	0.005***	−0.019***	0.002**	−0.002
Market-to-book	(2.947)	(−2.876)	(2.485)	(−0.172)
Book leverage	−0.134***	1.362***	−0.067***	0.671
Book leverage	(−3.091)	(6.702)	(−3.339)	(1.626)
Momentum	−0.096***	−0.555***	−0.032***	−0.811***
Momentum	(−5.300)	(−5.329)	(−3.919)	(−4.060)
Analyst forecast dispersion	−0.001	−0.053	0.013	0.152
Analyst forecast dispersion	(−0.044)	(−0.713)	(1.116)	(1.382)
Long-term growth rate	−0.037	1.641***	0.025	2.122***
Long-term growth rate	(−0.495)	(6.305)	(0.687)	(7.972)
Return on assets	−0.414***	−2.633***	−0.170***	−4.218***
Return on assets	(−3.941)	(−4.804)	(−3.464)	(−3.809)
Year fixed effects	Yes	Yes	Yes	Yes
Industry fixed effects	Yes	No	Yes	No
Firm fixed effects	No	Yes	No	Yes
Observations	17,910	17,910	17,910	17,910
Adjusted R²	0.869	0.629	0.275	0.629

Note(s): The table presents the 2SLS regression results. The instrumental variable, Distance to Religious Sites, is the distance between a firm and closest religious site. The dependent variables in the first stage are Corporate Integrity in Column (1) and Corporate Integrity Dummy in Column (3). The first-stage regressions include year fixed effects and industry fixed effects. The dependent variable in the second stage is the implied cost of equity capital. The key independent variables, Corporate Integrity and Corporate Integrity Dummy in Columns (2) and (4) are predicted by the first stage. The second-stage regressions include year fixed effects and firm fixed effects. Other variables are defined in Appendix A. t-statistics is based on standard errors adjusted for heteroscedasticity and clustered at the firm level. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively

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