Why “Good” Firms do Bad Things: The Effects of High Aspirations, High Expectations, and Prominence on the Incidence of Corporate Illegality

TLDR

Recent high‑profile corporate scandals involving prominent, high‑performing firms cast doubt on the idea that the cost of detection deters illegal behavior among top performers. The study seeks to explain why high‑aspiring, high‑expectation firms still engage in wrongdoing. Using loss‑aversion and hubris theories, the authors analyze a sample of S&P 500 manufacturers to investigate this paradox. They find that exceeding internal aspirations and external expectations raises the likelihood of illegal activity, that prominence amplifies the effect of exceeding expectations, and that firms with different prominence levels behave differently when performance falls short of aspirations.

Abstract

Recent high-profile corporate scandals involving prominent, high-performing firms cast doubt on assertions that the costs of getting caught decrease the likelihood such high performers will act illegally. We explain this paradox by using theories of loss aversion and hubris to examine a sample of S&P 500 manufacturers. Results demonstrate that both performance above internal aspirations and performance above external expectations increase the likelihood of illegal activities. The sample firms' prominence enhanced the effects of performance above expectations on the likelihood of illegal actions. Prominent and less prominent firms displayed different patterns of behavior when their performance failed to meet aspirations.