Study Shows Ethics Can Be Taught

When a qualifying exam de-emphasizes ethics, test takers are more likely to commit misconduct.

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.