Long-term Study on the Relationship Between Ethical Commitment, Corporate Financial Performance, and Valuation of Korean Companies

In recent decades, various stakeholders such as shareholders, managers, owners, customers, employees, policymakers, and environmentally-conscious NGOs have increasingly sought to understand the correlation between organizational business ethics and financial performance as well as stock market valuation. Despite the significance of this relationship, limited studies have explored the long-term connection between corporate ethical commitment, corporate valuation, and financial performance. To address this gap, our study examines the relationship between the Ethical Commitment Index of Korean companies and their financial performance and valuation in the Korean stock market from 2001 to 2021. BE data used in this study comes from two questionnaire surveys carried out in 2005 and 2015 on a sample of Korean companies. Since the data was collected using the same survey instrument, it is comparable for both research periods, which is necessary for a long-term analysis. We engaged a major research firm to conduct the surveys to minimize potential collection bias. For consistency, we used the same research firm in 2005 and 2015 and maintained a consistent data format across both periods. Given that our research question examines the relationship between business ethics and corporate valuation, we selected publicly traded companies with extended trading histories in the stock market. Our findings reveal a significant positive relationship between corporate ethical commitment and valuation on the KRX. Our findings bring meaningful insights to managers as well as various groups of stakeholders. In addition, the empirical analysis findings of this study confirm the logic of good management theory, and the more ethical activities & commitment a company engages in, the more outsider investors take this as a positive signal into stock market. Since the results of this study are consistent with the findings of the 2005 research, it was confirmed that the degree of ethical commitment of companies is meaningfully working as positive information to the stock market. This study provides meaningful insights and limitations for the empirical analysis results.