Financial Reporting and Moral Sentiments
42 Pages Posted: 20 May 2019 Last revised: 11 May 2021
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: Suggested Citation