RT Journal Article SR Electronic T1 Ethics, Earnings, and Equity Valuation JF The Journal of Portfolio Management FD Institutional Investor Journals SP 8 OP 16 DO 10.3905/jpm.2003.319879 VO 29 IS 3 A1 Robert D. Arnott YR 2003 UL https://pm-research.com/content/29/3/8.abstract AB Business ethics has been much in the news since the bursting of the bubble in 2000—but that ethics can have a direct bearing on corporate earnings and on valuation receives too little attention. Many observers draw comfort from the crackdown on fraudulent accounting, although dubious corporate accounting is but the tip of the iceberg. More benign (or rather more legal) forms of aggressive accounting probably boost U.S. corporate earnings by at least 20% even now. This means that valuation levels are higher than they seem by a like margin. A more subtle but pernicious impact of aggressive accounting affects the market indirectly—if people don't trust the numbers, they may price assets to reflect both a risk premium, reflecting objective risks in the markets, and a credibility premium, reflecting lingering investor concerns about the merits of the data that form the basis for valuation.