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Earnings Management and the Role of Moral Values in Investing


Gibson Brandon, Rajna; Sohn, Matthias; Tanner, Carmen; Wagner, Alexander F (2023). Earnings Management and the Role of Moral Values in Investing. European Accounting Review:Epub ahead of print.

Abstract

In this study, we use earnings management to examine (1) how investors regard a CEO’s commitment to honesty and (2) the impact of their perceptions, in light of their own moral values, on their investment decisions. In two laboratory experiments using students as investor proxies, we find that investors perceive a CEO as being more committed to honesty when they believe the CEO has engaged less in earnings management. A one standard deviation increase in a CEO’s perceived commitment to honesty, compared to that of another CEO, leads to a 40% reduction in the importance the investors assigned, when making investment decisions, to differences in the two CEOs’ claimed future returns. This effect is particularly pronounced among investors with a proself value orientation. For prosocial investors, their moral values and those they attribute to the CEO directly influence their investment decisions, with returns playing a secondary role. Our findings contrast with the idea, implicit in the literature on ‘sin’ stocks, that morality is a niche concern. By contrast, we find that moral values play a significant role for distinct types of investors and that they influence investment decisions for both moral and pecuniary reasons.

Abstract

In this study, we use earnings management to examine (1) how investors regard a CEO’s commitment to honesty and (2) the impact of their perceptions, in light of their own moral values, on their investment decisions. In two laboratory experiments using students as investor proxies, we find that investors perceive a CEO as being more committed to honesty when they believe the CEO has engaged less in earnings management. A one standard deviation increase in a CEO’s perceived commitment to honesty, compared to that of another CEO, leads to a 40% reduction in the importance the investors assigned, when making investment decisions, to differences in the two CEOs’ claimed future returns. This effect is particularly pronounced among investors with a proself value orientation. For prosocial investors, their moral values and those they attribute to the CEO directly influence their investment decisions, with returns playing a secondary role. Our findings contrast with the idea, implicit in the literature on ‘sin’ stocks, that morality is a niche concern. By contrast, we find that moral values play a significant role for distinct types of investors and that they influence investment decisions for both moral and pecuniary reasons.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Business and International Management
Social Sciences & Humanities > Accounting
Social Sciences & Humanities > Business, Management and Accounting (miscellaneous)
Social Sciences & Humanities > History
Social Sciences & Humanities > Arts and Humanities (miscellaneous)
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Economics, Econometrics and Finance (miscellaneous)
Uncontrolled Keywords:Earnings management, Honesty, Investor preferences, Investor segmentation, Protected values
Scope:Discipline-based scholarship (basic research)
Language:English
Date:22 December 2023
Deposited On:05 Jan 2024 11:13
Last Modified:30 Jun 2024 01:36
Publisher:Taylor & Francis
ISSN:0963-8180
OA Status:Hybrid
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1080/09638180.2023.2291408
Other Identification Number:merlin-id:24208
  • Content: Published Version
  • Language: English
  • Licence: Creative Commons: Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0)
  • Content: Accepted Version
  • Language: English
  • Permission: Download for registered users
  • Embargo till: 2025-07-22