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Friday, December 20, 2019

Can Ethics be Taught? Evidence from Securities Exams and Investment Adviser Misconduct

Kowaleski, Z., Sutherland, A. and Vetter, F.
Available at SSRN
Posted 10 Oct 19


We study the consequences of a 2010 change in the investment adviser qualification exam that
reallocated coverage from the rules and ethics section to the technical material section. Comparing advisers with the same employer in the same location and year, we find those passing the exam with more rules and ethics coverage are one-fourth less likely to commit misconduct. The exam change appears to affect advisers’ perception of acceptable conduct, and not just their awareness of specific rules or selection into the qualification. Those passing the rules and ethics-focused exam are more likely to depart employers experiencing scandals. Such departures also predict future scandals. Our paper offers the first archival evidence on how rules and ethics training affects conduct and labor market activity in the financial sector.

From the Conclusion

Overall, our results can be understood through the lens of Becker’s model of crime (1968, 1992). In this model, “many people are constrained by moral and ethical considerations, and did not commit crimes even when they were profitable and there was no danger of detection… The amount of crime is determined not only by the rationality and preferences of would-be criminals, but also by the economic and social environment created by… opportunities for employment, schooling, and training programs.” (Becker 1992, pp. 41-42). In our context, ethics training can affect an individual’s behavior by increasing the value of their reputation, as well as the psychological costs of committing misconduct. But such effects will be moderated by the employer’s culture, which affects the stigma of offenses, as well as the individual’s beliefs about appropriate conduct.

The research is here.