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Attitudes Toward Noncompliance and the Demand for External Financing

Published online by Cambridge University Press:  07 September 2018

Robert H. Davidson  and
Christo Pirinsky
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Abstract

We study the link between the individual propensity to violate moral principles and the demand for finance based on two data sets: the World Values Survey and a data set with the legal records of U.S. chief executive officers (CEOs). We find that individuals who are more tolerant of moral principle violations are more likely to borrow. Corporate executives with legal records are also associated with larger mortgages. Reverse causality and attitudes toward risk are unlikely explanations for our findings. We contend that noncompliance relaxes participation constraints in capital markets by lowering the psychological costs of entering and breaking a contract.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 967 - 991
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Vladimir Atanasov, Jennifer Conrad (the editor), Bruno Ferman, Campbell Harvey, Christian Leuz, Gregor Matvos, Uday Rajan, Tracy Wang (the referee), and seminar participants at the 2012 Miami Behavioral Finance Conference, the U.S. Securities and Exchange Commission, and the Stevens Institute of Technology for their helpful feedback.

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