Effect of ethical climate on corporate financial performance in Pakistan: An application of confirmatory tetrad analysis (CTA-PLS) approach

Abstract

The ethical climate is one of the essential sub-constructs of organizational climate. It focuses on the ethical working behaviors of organizational members, including management and employees. Generally, ethical activities are considered as a hindrance to the corporate economic performance that is the root cause of unethical activities in organizations. This study has two main objectives. First, to establish and validate the six-factor ethical climate second-order construct. Purposely, the confirmatory tetrad analysis-partial least square (CTA-PLS) approach was applied to identify the right type of hierarchical latent variable (second-order construct). Second, to assess the effect of ethical climate on corporate financial performance in the context of Pakistan. The results first, confirm that type I (reflective-reflective) is appropriate for higher-order construct of ethical climate. Second, the significant direct effect of ethical climate and corporate financial performance is established by using the partial least square – structural equation modeling (PLS-SEM).

Keywords

• ethical climate
• financial performance
• hierarchical latent variable
• second-order
• higherorder