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Financial reporting and moral sentiments

Author

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  • Lunawat, Radhika
  • Shields, Timothy W.
  • Waymire, Gregory

Abstract

Scholars have long suspected that people behave differently when their actions will be observed by or revealed to others. We hypothesize that financial reporting that reveals managers' actions will lead managers to take actions that better align with investor interests. We test this hypothesis with an experiment in which we manipulate the availability of a financial report that reveals managerial actions. Our evidence shows that financial reporting leads a manager to choose reinvestment and resource-sharing actions that better align with investor interests, even when the investor can impose no cost or confer no reward on the manager. This effect holds when the investor can shut down the firm and take a sizable portion of the assets. Our evidence suggests that financial reporting's economic value comes not only from its traditional contracting function, but also because managers care about investors' moral evaluations of them that are enabled by reporting.

Suggested Citation

  • Lunawat, Radhika & Shields, Timothy W. & Waymire, Gregory, 2021. "Financial reporting and moral sentiments," Journal of Accounting and Economics, Elsevier, vol. 72(1).
    • Handle: RePEc:eee:jaecon:v:72:y:2021:i:1:s0165410121000367
    DOI: 10.1016/j.jacceco.2021.101421
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    1. Luminita Enache & Hila Fogel‐Yaari & Heather Li, 2022. "Signalling long‐term focus through textual emphasis on innovation: are firms putting their money where their mouth is?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3791-3836, September.

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    More about this item

    Keywords

    Financial reporting; Blameworthy; Praiseworthy; Moral sentiments; Self-regulation;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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