Do Executives Behave Better When Dishonesty is More Salient?
In behavioral experiments, individuals are less likely to cheat at a task when the saliency of dishonesty is increased [Mazar, Amir, and Ariely (2008) Gino, Ayal, and Ariely (2009) We test a similar hypothesis in a real world setting by treating news about high profile political scandals as shocks to the salience of unethical/illegal behavior and its consequences. We find that local corporate insiders engage in fewer suspect behaviors in the year after a political scandal is revealed. Their stock sales are less profitable and they are less likely to sell stock ahead of large price declines, suggesting less illegal insider trading. These patterns vary predictably with the level of media attention to scandal related events during the scandal years. Locally headquartered firms also appear to engage in less earnings management following the revelation of a political scandal. However, these changes in executives' behaviors appear to be largely transitory and the evidence of suspect behaviors resumes in following years.