Does Hypocrisy Reduce Firm Value? Evidence from China

We investigate how investors value corporate hypocrisy, the ethical dissonance between corporate philanthropic giving and environmental misconduct, and further examine the moderating effect of analyst coverage. Using a sample of Chinese-listed firms over 2006–2019, our findings reveal that hypocrisy is significantly negatively associated with firm value, suggesting that hypocrisy brings out contingencies and uncertainties in corporate operation, erodes perceived trust from investors, results in the cognitive confusion in the market, and eventually reduces firm value. Moreover, analyst coverage attenuates the negative effect of hypocrisy on the firm value. Above findings are robust to sensitivity tests using alternative proxies for hypocrisy and firm value and are still valid after using the Heckman two-stage model and a difference-in-difference design to address the endogeneity. The negative effect of hypocrisy on firm value is more pronounced for remedial (ex-post) hypocrisy than for preventive (ex ante) hypocrisy. Furthermore, firm value is negatively affected by other types of hypocrisy based on the ethical dissonances between corporate philanthropy and financial misconducts (employees' layoff concerns). Lastly, the impact of hypocrisy on firm value is more pronounced for firms with high state ownership, non-BIG10-audited firms, and firms in regions with low social trust and with high marketization.