The High Cost of Cheap Talk: How Disingenuous Ethical Language Can Reflect Agency Costs.

Does the ethical language that managers use matter? In contrast to previous research arguing that “talk is cheap,” we predict that managers could be opportunistically lying to stakeholders about their ethical intentions, in order to reduce pressure for corporate social responsibly (CSR). That is, disingenuous ethical communication from managers can be indicative of agency costs. We test this prediction by inductively creating a dictionary of cheap talk words using a matched sample of Code of Ethics from S&P 1500 firms committing a large restatement and non-restating firms. We show that firms increasing use of cheap talk words in their annual reports (10-Ks) is associated with decreasing CSR, but that classic agency theory prescriptions (i.e., monitoring and incentives) can reduce this effect. That is, the negative relation between cheap talk and CSR is reduced by internal monitoring (i.e., board independence), external monitoring (i.e., analyst coverage) and incentives (i.e., unexercisable option pay). We also show that exercisable option pay can actually make agency problems worse, by strengthening the negative relation between cheap talk and CSR. We contribute to the literature on the importance of managerial communication by predicting and showing the high cost of disingenuous ethical language.