1.

)The Empirical Assessment of Corporate Ethics: A Case Study

Author(s), year published, Title of article, Name of periodical:

Kaptein, Muel and Van Dalen, Jan. (2000). The Empirical Assessment of
Corporate Ethics: A Case Study. Journal Business Ethics, vol. 24, pp. 95-114.

Statement of the Articles Research Problem:

How does one quantify corporate ethics?

Goals, Purpose and Significance of the Article:

o Goal: Conduct an empirical analysis of the ethics of corporations
o Purpose: To help an organizations managers improve their ethical
climate
o Significance: It is one of a few studies on empirically analyzing
corporate ethics

Framework & Findings of Prior Published Research Reviewed by the Article:

o 3 Existing perspectives in business ethics:
1.) Conseqence/impact approach (see among others Elkington,
1997; Wheeler and Sillanpaa, 1997; and Zadek et al., 1997):
describes the ethics of an organization by examining the impact
of business activities on stakeholders.
A disadvantage of this approach is that meaningful
comparisons of different organizations are difficult to
make. For instance, a firm that causes little environmental
damage is not necessarily more ethical than a firm that
has a disastrous impact on the environment, but produces
goods with large societal value.
2.)
Conduct/behavior approach: this approach examines the
actual conduct of individual representatives of organizations. It
is employed by forensic accountants, detectives and fact-finding
experts, for instance, to determine the extent of fraud, the
existence and nature of sexual intimidation, and the leaking of
confidential information (Bologna et al., 1995).
This approach essentially analyses ethical incidents. It has
not primarily been designed to express an overall
judgment of the ethical content of the entire organization.
3.) Context/input approach: aims to characterize the climate
within organizations (for instance, as caring, law and code
oriented, rules oriented, instrumental or independent; Victor and
Cullen, 1987, 1988, 1989) or their stage of moral development
(for instance, as pre-conventional, conventional and postconventional; see e.g., Pearson, 1995; Wood et al., 1988;
Weber,1990, 1991).
A disadvantage of this approach is that the suggested
typologies do not provide solid ground for objectively

evaluating the current corporate ethical state or to

prescribe
the
optimal
course
for
organizational
development. There is, for example, no reason why a
climate of caring should be worse or better than a climate
of rules in any given situation.
Notions about the ethics of a business
1.) Association/reductionist model
(see
MacLagan, 1998;
Velasquez, 1983): limits the responsibility of corporations to the
responsibilities
of
individuals
within
the
organization.
Corporations carry responsibilities only to the extent to which
these responsibilities can be traced back to individuals. Moral
problems in a business setting are interpreted as problems of
the individual employees who are somehow involved in this
setting. The association model therefore delineates the ethics of
organizations, henceforth denoted as corporate ethics, as the
aggregate of the ethics of individuals. This conceptualization is
no doubt useful to study various ethical issues but has serious
limitations in analyzing many practical ethical questions that
generally occur in the organizational setting. In particular, this
conceptualization is not suitable for studying situations in which
several individualssimultaneously bear a responsibility. This is
typically the case for complex, non-transparent situations in
which responsibility is spread over several individuals at the
same time or for organizational processes, which involve various
responsible individuals at different points in time. Also, by
neglecting corporate culture, which emerges from the
interactions among personnel and between personnel and
(other) stakeholders, the association model tends to treat the
organization as a "tabula rasa", an empty entity.
2.) Autonomy model (e.g., Bovens, 1998; French,1984;
Goodpaster and Matthews, 1982; Wempe,1998; Werhane, 1985):
treats the organization itself as a moral entity that shoulders
responsibilities, offers a more promising conceptualization of
corporate ethics. It differs from the reductionist model by taking
the manifold activities within organizations as an integrated and
coherent collection of activities instead of a collection of
activities of atomistically acting individuals. This coherence is
the consequence of the coordinating impact of organizational
structure and culture (i.e. the corporate (internal) context). The
corporation is considered a moral actor and can, therefore, be
judged in moral terms as there is a corporate culture and
structure that can be distinguished from the individuals who
work within the corporation. According to this model, it is
possible to identify and evaluate the actions, conscience, and

intention of a corporation. It is important to note, though, that

the acceptance of the idea of a collective responsibility does not
imply that individual responsibilities are no longer relevant (cf.
Bovens, 1998).
The implied conceptualization of corporate ethics in the
autonomy model is both more realistic and potentially
fruitful than that in the reductionist model. It is more
realistic in that it takes into account the many instances in
which responsibilities cannot be traced to individual
stakeholders in the organizational context. Even in
complex or multi-period organizational processes,
responsibilities can be localized by referring to
departments, management or the organization rather
than to individual employees. It is potentially more
fruitful, because it allows one to focus on organizational
factors that are assumed to impede or stimulate ethical
conduct instead of identifying the constituents of the
morality of individuals. If one assumes that organizational
structure and culture condition individual behavior (as do,
e.g. Sims, 1991; Trevino, 1986; Trevino and Youngblood,
1990) and if one can distinguish this organizational
context from the personal intentions and intuitions of
individual employees, it makes sense to assess the ethical
content of organizations empirically and to evaluate the
influence of organizational ethics on individual or group
behavior.

Framework of the Article:

Research Design and Method:

Type of Inquiry
Qualitative Research
Quantitative Research
Both Qualitative
Research

and

Quantitative

Research Design
The study was a causal design with operating performance operationalized as
operating income scaled by sales. To control for changing industry and

economy-wide conditions, industry-adjusted performance metric was

computed by comparing the operating performance to the median operating
performance of firms in the same industry. Operating performance of the
sample firms were also compared to the operating performance of similar
firms in a similar industry.

The Articles Research Population and How It Drew Upon This Population in
Conducting Its Research Inquiry:

The researchers conducted their study in 1997 by interviewing employees of a

European financial multinational organization. Three business units were
selectedthe first one was chosen because it was deemed as fraud-free. The
second unit was chosen because of small occurrences of fraud, and the third unit
was chosen of two grievous fraudulent instances.

Research Data Collected and Analysis Used:

Analysis used was test of median between the operating income of the sample
firms and the operating income of the control firms. After the test of median, a
multivariate analysis on the changes in operating income was used. The
dependent variable was the performance adjusted operating income scaled by
sales. The independent variables include a dummy variable indicating a tender
offer, the ratio of the size of the firm relative to that of the combined firm,
market to book ratios for both the acquirer and the target, a dummy variable
indicating that the acquirer and the target are in the same industry and estimate
for discretionary accrual in the fiscal year preceding the acquisition.

Summary of the Results:

Results suggest that acquiring firms significantly outperform their control firms.
Moreover, there is no significant difference between the three modes of payment
and the operating performance.
The multivariate regression shows that discretionary accruals are significantly
negative. Moreover, current discretionary accruals are more significant than
long-term discretionary accruals. Mergers in the same industry are also
significantly greater. Market to book ratio of the acquiring firm is significantly
positive. Interaction between the market to book ratios of the acquiring and the
target firm is significantly positive.

Conclusions:

High increase in operating income if firms with high MTB acquire firms in the
same industry with low MTB.

2.)The International Business Ethics Index: USA 2006

Author(s), year published, Title of article, Name of periodical:
Heron, Randall and Lie, Erik. (2002). Operating Performance and the Method of
Payment in Takeovers. Journal of Financial and Quantitative Analysis, vol. 37, n.
1, pp. 137-155.

Statement of the Articles Research Problem:

What is the relation between the method of payment in acquisitions, earnings
management and operating performance?
Goals, Purpose and Significance of the Article:

Framework & Findings of Prior Published Research Reviewed by the Article:

Prior Research:
Healy, Palepu and Ruback (1992) found that the 50 largest mergers between
1979 and 1984 report an improved operating performance after the merger.
They made use of a regression model with post-acquisition operating
performance regressed against pre-merger performance and a dummy
variable capturing the form of financing.

Framework of the Article:

Research Design and Method:
Type of Inquiry
Check one

Qualitative Research
Quantitative Research
Both Qualitative
Research

and

Quantitative

Research Design
The study was a causal design with operating performance operationalized as
operating income scaled by sales. To control for changing industry and

economy-wide conditions, industry-adjusted performance metric was

computed by comparing the operating performance to the median operating
performance of firms in the same industry. Operating performance of the
sample firms were also compared to the operating performance of similar
firms in a similar industry.

The Articles Research Population and How It Drew Upon This Population in
Conducting Its Research Inquiry:

The study included a sample of 859 acquisitions conducted between 1985 and
1997. The source of the sample is the Securities Data Companys Mergers and
Acquisitions database and only included those wherein both target and acquiring
firm are publicly traded. Financial firms were excluded from the population due
to regulatory requirements and different accounting practices.

Research Data Collected and Analysis Used:

Analysis used was test of median between the operating income of the sample
firms and the operating income of the control firms. After the test of median, a
multivariate analysis on the changes in operating income was used. The
dependent variable was the performance adjusted operating income scaled by
sales. The independent variables include a dummy variable indicating a tender
offer, the ratio of the size of the firm relative to that of the combined firm,
market to book ratios for both the acquirer and the target, a dummy variable
indicating that the acquirer and the target are in the same industry and estimate
for discretionary accrual in the fiscal year preceding the acquisition.

Summary of the Results:

Results suggest that acquiring firms significantly outperform their control firms.
Moreover, there is no significant difference between the three modes of payment
and the operating performance.
The multivariate regression shows that discretionary accruals are significantly
negative. Moreover, current discretionary accruals are more significant than
long-term discretionary accruals. Mergers in the same industry are also
significantly greater. Market to book ratio of the acquiring firm is significantly
positive. Interaction between the market to book ratios of the acquiring and the
target firm is significantly positive.

Conclusions:

High increase in operating income if firms with high MTB acquire firms in the
same industry with low MTB.

Recommendations/ Areas for Further Study:

3.)Ethical Ratings: A Systematic Analysis Oriented to Business

Economics
Author(s), year published, Title of article, Name of periodical:
Heron, Randall and Lie, Erik. (2002). Operating Performance and the Method of
Payment in Takeovers. Journal of Financial and Quantitative Analysis, vol. 37, n.
1, pp. 137-155.

Statement of the Articles Research Problem:

What is the relation between the method of payment in acquisitions, earnings
management and operating performance?
Goals, Purpose and Significance of the Article:

Framework & Findings of Prior Published Research Reviewed by the Article:

Prior Research:
Healy, Palepu and Ruback (1992) found that the 50 largest mergers between
1979 and 1984 report an improved operating performance after the merger.
They made use of a regression model with post-acquisition operating
performance regressed against pre-merger performance and a dummy
variable capturing the form of financing.

Framework of the Article:

Research Design and Method:
Type of Inquiry
Check one

Qualitative Research
Quantitative Research
Both Qualitative
Research

and

Quantitative

Research Design
The study was a causal design with operating performance operationalized as
operating income scaled by sales. To control for changing industry and
economy-wide conditions, industry-adjusted performance metric was
computed by comparing the operating performance to the median operating
performance of firms in the same industry. Operating performance of the
sample firms were also compared to the operating performance of similar
firms in a similar industry.

The Articles Research Population and How It Drew Upon This Population in
Conducting Its Research Inquiry:

The study included a sample of 859 acquisitions conducted between 1985 and
1997. The source of the sample is the Securities Data Companys Mergers and
Acquisitions database and only included those wherein both target and acquiring
firm are publicly traded. Financial firms were excluded from the population due
to regulatory requirements and different accounting practices.

Research Data Collected and Analysis Used:

Analysis used was test of median between the operating income of the sample
firms and the operating income of the control firms. After the test of median, a
multivariate analysis on the changes in operating income was used. The
dependent variable was the performance adjusted operating income scaled by
sales. The independent variables include a dummy variable indicating a tender
offer, the ratio of the size of the firm relative to that of the combined firm,
market to book ratios for both the acquirer and the target, a dummy variable
indicating that the acquirer and the target are in the same industry and estimate
for discretionary accrual in the fiscal year preceding the acquisition.

Summary of the Results:

Results suggest that acquiring firms significantly outperform their control firms.
Moreover, there is no significant difference between the three modes of payment
and the operating performance.
The multivariate regression shows that discretionary accruals are significantly
negative. Moreover, current discretionary accruals are more significant than
long-term discretionary accruals. Mergers in the same industry are also
significantly greater. Market to book ratio of the acquiring firm is significantly

positive. Interaction between the market to book ratios of the acquiring and the
target firm is significantly positive.

Conclusions:

High increase in operating income if firms with high MTB acquire firms in the
same industry with low MTB.

Recommendations/ Areas for Further Study: