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

Abstract

Does the use of a certain type of ethical language indicate that managers are failing to behave in a socially responsible manner? Managers are increasingly using language related to ethics, values, and corporate purpose in their communications with stakeholders. However, while economic models argue that “talk is cheap,” we predict that some ethical language (i.e., cheap talk) can reflect agency costs. That is, cheap talk reflects managers being disingenuous with stakeholders about their ethical intentions in order to reduce pressure on corporate social performance (CSP). We test this prediction by inductively creating a dictionary of cheap talk words and demonstrating that the use of cheap talk in annual reports (10-Ks) is associated with decreasing CSP. We also examine how monitoring by stakeholders concerned about CSP (specifically, security analysts and women board membership) can reduce this effect, and how certain types of executive compensation (specifically, exercisable and non-exercisable options) can either alleviate or worsen this effect. We contribute to the cheap talk literature (a subset of the impression management literature) by showing the high cost of disingenuous ethical language (i.e., cheap talk). We also add to the literature distinguishing between “values” and “legal” ethical talk by showing in post hoc analyses that words reflecting values are more likely to be cheap talk.