The impact of corporate ethical standards on the liquidity of non-U.S. stocks: an examination of the Chinese Melamine Scandal

Our study investigates the relationship among liquidity, information asymmetry, and business ethics for non-U.S. stocks listed on the New York Stock Exchange (NYSE). Our results show that non-U.S. stocks from countries with lower ethical standards tend to have wider spreads and a larger price impact of trades. To explore the impact of corporate ethical standards on liquidity and information asymmetry, we analyze the 2008 Chinese Melamine Scandal which involved the contamination of infant formula and other food products with the toxic chemical melamine, causing widespread illness and several deaths. Our findings reveal that after the scandal announcement, market liquidity and information asymmetry for non-U.S. stocks from China worsened. Overall, our study provides evidence that negative shocks resulting from corporate ethical lapses, such as the Chinese Melamine Scandal, can significantly impact the liquidity and information asymmetry of non-U.S. stocks from countries with compromised ethical standards.