Attitudes towards Non-Compliance and the Demand for External Finance

Robert H Davidson
Pamplin School of Business, Virginia Polytechnic Institute and State University

Christo Pirinsky
United States Securities and Exchange Commission


We study the link between individual propensity to violate moral principles and demand for finance based on two datasets – the World Values Survey and a dataset with the legal records of CEOs of U.S. publicly traded companies. We find that individuals who are more tolerant of moral principle violations are more likely to borrow. Corporate executives with legal records are associated with larger mortgages (both in absolute terms and relative to the value of their home). Reverse causality and individual attitudes towards risk are unlikely explanations of our findings. We contend that non-compliance relaxes participation constraints in capital markets by lowering the psychological costs of entering and breaking a contract.

Keywords: Compliance, morality, external financing, borrowing decisions.

JEL Classification Codes: G02; G21; K42

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