WHILE CRITICS OFTEN have asked if ethics really can be taught,
a new large-sample study suggests the answer is yes. The
research was conducted by Zachary Kowaleski, an assistant
professor of accountancy in the University of Notre Dame’s
Mendoza College of Business in Indiana; Andrew Sutherland,
the Ford International Career Development Professor of Accounting
at the MIT Sloan School of Management at the Massachusetts
Institute of Technology in Cambridge; and Felix Vetter,
a doctoral candidate at the London School of Economics.
The researchers studied nearly 1.2 million investment advisers
and financial representatives working at U.S. broker-dealers
between 2007 and 2017. They focused on the consequences of a
2010 change in the investment adviser qualification exam. Prior
to the change, the exam’s rules and ethics section—which covers
allowable forms of compensation, disclosure requirements,
and prohibitions of unethical business practices—had an 80 percent
weight. The exam’s technical section—which covers such
topics as capital market theory, investment vehicle characteristics,
ratios, and financial reporting—had a 20 percent weight.
After the change, each section was weighted at 50 percent.
The authors discovered that those passing the older exam
containing more rules and ethics coverage were one-fourth less
likely to commit misconduct, including obvious offenses such as
fraud, theft, or deception.
The researchers speculate that the
exam plays a “priming” role, so that
early exposure to rules and ethics
material prepares individuals to
behave appropriately later. Those
passing the exam without prior
misconduct appear to respond
most to the amount of material
relating to rules and ethics on their
exam. Those already engaging in misconduct,
or having spent several years
working in the securities industry, respond least or not at all.
The study also examines what happens when people with
more ethics training find themselves surrounded by bad behavior,
and it shows that these individuals are more likely to leave
their jobs. “That those with more ethics training are more likely
to leave misbehaving organizations," says Kowaleski, "suggests
the self-reinforcing nature of corporate culture.”
Download “Can Ethics Be Taught? Evidence from Securities Exams and Investment Adviser Misconduct” forthcoming in the
Journal of Financial Economics.