Ethical financial management: code of ethics quality and the cost of debt

Purpose – The growing focus on corporate ethics, driven by a series of high-profile corporate scandals, has highlighted the necessity for companies to adopt high-quality ethical codes, thereby drawing significant attention from academic literature. Under the lens of agency theory, this study aims to investigate the impact of the quality of ethical codes on the cost of debt. Design/methodology/approach – A scoring model was used to assess the quality of ethical codes across 110 listed firms within the S&P 500 index. Subsequently, a linear regression model was employed to examine the influence of ethical code quality on the cost of debt. Findings – The findingsreveal a negative relationship between the quality of ethical codes and the cost of debt. This suggests that companies demonstrating a stronger ethical commitment, as evidenced by the adoption of high-quality ethical codes, gain financial benefits through more favorable financing conditions. Practical implications – This study offers valuable practical implications for firms. By demonstrating the negative relationship between high-quality ethical codes and the cost of debt, it provides firms with a compelling incentive to develop such codes. In this regard, this study emphasizes the importance of prioritizing the conscientious and effective implementation of ethical codes over their mere formal adoption. Originality/value – This study makes significant contributions to the academic literature. Firstly, it enhances knowledge regarding ethical code quality by conducting an in-depth analysis of a diverse sample of leading US-listed companies. Secondly, it highlights the financial advantages associated with the development of high-quality ethical codes. Thirdly, it broadens the application of agency theory to explain the complex relationship between ethical code quality and the cost of debt.