Conflict of Interest Disclosure With High Quality Advice: The Disclosure Penalty and the Altruistic Signal

58 Pages Posted: 13 Nov 2019

See all articles by Sunita Sah

Sunita Sah

Johnson Graduate School of Management, Cornell University

Daniel Feiler

Tuck School of Business at Dartmouth

Date Written: October 9, 2019

Abstract

Advisors often have conflicts of interest: a potential clash between professional responsibilities and self-interests. Disclosure — informing advisees of the conflict — is a common policy response to manage such conflicts. However, extant research on disclosure has often confounded disclosure with poor quality advice. In this paper, we explore whether laws requiring conflict of interest disclosure damage the advisor-advisee relationship more than is intended. Across six experiments (N = 1,766), we examine situations in which advisors give high quality advice but still must disclose a conflict of interest. As predicted, such disclosures yield negative attributions regarding the advisor’s character, even when advice is of high quality (and advisees have full information to judge advice quality), and even when the advisor’s professional responsibility and self-interest are aligned, or the advice runs counter to the advisor’s self-interest. This disclosure penalty decreases trust in honest advisors but can be mitigated if the advisees are explicitly told that their advisor’s conflict of interest arose from external factors beyond the advisor’s control. When advisors’ recommendations run counter to their self-interests, conflict of interest disclosure creates an independent competing effect — the altruistic signal — which increases trust. The net effect on trust depends on which effect — the disclosure penalty or altruistic signal — is stronger. We discuss the implications of these findings for law and policy.

Keywords: conflicts of interest, disclosure, trust, advice, judgment and decision-making

JEL Classification: K1, K10, M1, M38

Suggested Citation

Sah, Sunita and Feiler, Daniel, Conflict of Interest Disclosure With High Quality Advice: The Disclosure Penalty and the Altruistic Signal (October 9, 2019). Available at SSRN: https://ssrn.com/abstract=3480212 or http://dx.doi.org/10.2139/ssrn.3480212

Sunita Sah (Contact Author)

Johnson Graduate School of Management, Cornell University ( email )

Ithaca, NY 14853
United States

Daniel Feiler

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

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