Financial Reporting and Moral Sentiments

56 Pages Posted: 20 May 2019 Last revised: 20 Mar 2020

See all articles by Radhika Lunawat

Radhika Lunawat

University of California, Irvine - Accounting Area

Timothy W. Shields

Chapman University - George L. Argyros School of Business & Economics; Chapman University - Economic Science Institute

Gregory B. Waymire

Emory University - Department of Accounting

Date Written: February 14, 2020

Abstract

Smith and Wilson (2019) posit that we self-regulate our actions to conform with what we believe is socially appropriate. The mechanism is Adam Smith’s “Impartial Spectator,” a fictitious individual constructed in the mind who helps us predict whether our actions and motivations will earn others’ approval or disapproval. We hypothesize that financial reporting activates this mechanism and leads managers to take actions that are better aligned with investor interests. We test this hypothesis with an experiment where we manipulate the availability of a financial report that reveals earnings and assets, and thus the actions of the manager. Our evidence shows that financial reporting better aligns a manager’s reinvestment and resource sharing actions with investor interests even though the investor can impose no cost or confer no reward on the manager. This effect is robust to giving the investor a right to dissolve the firm at any point and take a sizable portion of the assets. Our evidence is important because it suggests that at least part of financial reporting’s economic value derives from implicating human moral thinking and feelings in addition to its traditional contracting function.

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 (February 14, 2020). 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 - George L. Argyros School of Business & Economics ( email )

One University Drive
Orange, CA 92866
United States
714.289.2092 (Phone)

HOME PAGE: http://sites.google.com/site/timothywshields/

Chapman University - Economic Science Institute ( email )

One University Dr.
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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