When scandal doesn’t hurt enough: Lessons from corporate misconduct in Japan
ALEXANDR AKIMOV HIROSHI MORITA AND AKIHIRO OMURA |
Corporate scandals often make headlines, triggering public outrage, consumer backlash and intense media scrutiny. Yet despite growing expectations for corporate transparency, stronger environmental, social and governance (ESG) reporting, and tighter consumer protections, many companies continue to engage in unethical or unlawful behaviour. Why?
New research examining more than two decades of corporate scandals in Japan suggests that the answer may lie in how different stakeholders respond—and, more importantly, how long those responses last.
The study analysed 895 corporate scandals involving 319 Japanese companies between 1995 and 2018 to understand the financial consequences of unethical corporate behaviour. By examining changes in profitability and corporate value before and after scandals, the researchers explored whether companies face sufficient financial penalties to discourage future misconduct.
The findings reveal a striking disconnect between the reactions of consumers and financial markets.
Consumers react quickly—but not for long
When a company is caught engaging in unethical conduct, consumers and clients tend to respond immediately. They may stop purchasing products, switch to competitors or reconsider business relationships. This rapid loss of trust translates into lower profitability, reflected in declining returns on assets (ROA) and returns on equity (ROE).
However, the study found that this response weakens over time. As companies become involved in repeated scandals, consumers appear less likely to continue punishing them. Whether due to fading public attention, limited alternatives or the normalisation of corporate misconduct, the financial impact on profitability becomes less pronounced with successive incidents.
This suggests that reputational damage alone may not provide a lasting deterrent against unethical behaviour.
Financial markets tell a different story
Investors respond quite differently.
Rather than reacting strongly to a single scandal, financial markets appear to tolerate isolated incidents. Only when companies experience multiple scandals within a relatively short period do investors begin to reassess corporate risk and demand higher returns. This is reflected in an increased implied cost of capital—a measure of how much investors require in return for investing in a company.
In other words, the market tends to treat a one-off scandal as an exception rather than evidence of systemic governance problems.
For company executives whose primary responsibility is to maximise shareholder value, this delayed market response may weaken incentives to invest in stronger ethical governance after an initial scandal.
Why the penalties may not be enough
The study also points to a structural feature of Japanese companies that may reduce the financial consequences of misconduct. Many firms operate with relatively high debt-to-asset ratios, relying heavily on borrowed capital rather than equity financing.
As a result, increases in the cost of equity following scandals may have only a limited effect on a company’s overall financing costs. If the economic consequences of misconduct are relatively small, executives may conclude that the costs of unethical behaviour are manageable.
Combined with consumers’ diminishing reactions over time, this creates a situation where repeated misconduct may not significantly threaten long-term corporate value.
Building stronger accountability
The research highlights the importance of aligning stakeholder responses with corporate governance mechanisms. If consumers quickly lose interest while financial markets respond only after repeated offences, companies may receive mixed signals about the true costs of unethical behaviour.
Stronger governance frameworks, more effective regulatory oversight and greater emphasis on sustained accountability could help ensure that misconduct carries meaningful consequences before it becomes a recurring pattern.
Ultimately, protecting corporate reputation is not simply about avoiding negative headlines. It is about creating governance systems where ethical behaviour is consistently rewarded—and where misconduct is costly enough to make prevention the rational business decision.
Associate Professor Alexandr Akimov and Dr Akihiro Omura are members of the Griffith Asia Institute and Professor Hiroshi Morita is from Yokohama National University, Yokohama, Japan.
This article is a synopsis of the publication: Akimov, A., Morita, H., Omura, A. (2026). Corporate Financial Consequences of Corporate Scandal: The Case of Japan. In: Takahashi, M., Kishi, M., Dassanayake, M.S. (eds) Communication and Knowledge in Organizations. Translational Systems Sciences, vol 47. Springer, Singapore. https://doi.org/10.1007/978-981-95-0622-4_5
This research is funded by Grants-in-Aid for Early-Career Scientists (KAKENHI) Grant Number 19K13863, Japan.