Although interest in business ethics has been increasing, the lack of a theoretical analytical framework for examining the impact of ethical management on corporate performance means that business ethics still occupies a peripheral position in management studies. Accordingly, this study aimed to present such a framework by examining whether corporate ethicality is a suitable variable for discriminating between distressed and healthy firms, and by testing whether it is appropriate as an explanatory variable in distress prediction models. This study focused on firms that became distressed between December 1997 and December 1998 and their matched healthy counterparts, using entertainment expenses and welfare benefit expenditures—which are highly susceptible to being diverted for managers' personal use or used to conceal profits—as indicators of corporate ethicality. The results can be summarized in three points. First, distressed firms were found to spend more on entertainment expenses and welfare benefits than healthy firms. In particular, the entertainment expense-to-sales ratio and the rate of change in entertainment expenses showed statistically significant differences between the two groups. Second, in the year prior to distress, distressed firms exhibited rates of change in entertainment expenses that exceeded their rates of change in sales. Third, the welfare benefit ratio was adopted as a useful variable in a corporate distress prediction model using LOGIT analysis, demonstrating prediction accuracy of 97% for the estimation sample and 85% for the holdout sample.