Stock Market Responses to Unethical Behavior in Organizations: An Organizational Context Model

We develop and test a model that extends the understanding of how people react to news of organizational unethical behavior and how such reactions impact stock performance. We do so by taking into account the interplay between the features of specific unethical acts and the features of the organizational context within which unethical acts occur. We propose a two-stage model in which the first stage predicts that unethical acts that benefit the organization are judged less harshly than are unethical acts that benefit the actor, when the organization is seen as pursuing a moral goal (e.g., producing inexpensive medicine rather than tobacco products). In such cases, the motives behind the unethical act are construed as an individual's intentions to pursue a moral end. The second stage of our model connects moral judgment to action against the organization as a whole. We propose that moral judgments of an unethical act are more likely to translate into negative economic consequences for the organization when the unethical act is seen as benefiting the organization, because in such cases the organization is construed as an accomplice. Study 1 is an event study of stock market reactions to organizational unethical behavior in which the features of organizational unethical behavior were operationalized by coding media coverage of unethical acts. Study 2 is an experiment that used news stories to manipulate features of unethical behavior and measured participants' estimates of stock performance, while incentivizing participants for accuracy. Both studies found support for our model.