Financial Reporting and Moral Sentiments

42 Pages Posted: 20 May 2019 Last revised: 11 May 2021

See all articles by Radhika Lunawat

Radhika Lunawat

University of California, Irvine - Accounting Area

Timothy W. Shields

Chapman University - The George L. Argyros College of Business and Economics; Chapman University - Economic Science Institute

Gregory B. Waymire

Emory University - Department of Accounting

Date Written: May 10, 2021

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.

Keywords: Financial reporting, Blameworthy, Praiseworthy, Moral sentiments, Self-regulation

JEL Classification: C92, D82, D91, M40

Suggested Citation

Lunawat, Radhika and Shields, Timothy W. and Waymire, Gregory B., Financial Reporting and Moral Sentiments (May 10, 2021). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3373378 or http://dx.doi.org/10.2139/ssrn.3373378

Radhika Lunawat

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Timothy W. Shields (Contact Author)

Chapman University - The George L. Argyros College of Business and Economics ( email )

1 University Drive
Orange, CA 92866
United States

Chapman University - Economic Science Institute ( email )

1 University Drive
Orange, CA 92866
United States

Gregory B. Waymire

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-6589 (Phone)
404-727-6313 (Fax)

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