ABSTRACT Using an integrated reporting setting with environmental, social, and governance (ESG) information alongside financial reporting, we experimentally examine the effects of ESG assurance provider (CPA firm or non-CPA firm) and disclosure of assurance team composition (present or absent disclosure of a multidisciplinary team including assurance practitioners, engineers, and scientists) on investor judgments. Consistent with Source Credibility Theory, limited assurance by either provider, versus no assurance, enhances the credibility of ESG information, increasing investors’ willingness to invest. Next, relative to a non-CPA firm, engaging the financial statement CPA firm for ESG assurance increases willingness to invest due to heightened perceptions of the CPA firm’s moral authority and cognitive authority. Finally, disclosing team composition that highlights multidisciplinary expertise enhances perceptions of cognitive authority for a non-CPA firm, increasing investment willingness to a greater extent than for a CPA firm. Our findings have implications for ESG assurance markets and standard setting. Data Availability: Data are available from the authors upon request.
We investigate whether favorable attitudes toward global justice could increase taxpayers' willingness to be compliant if taxpayers value the redistribution of their tax dollars internationally to reduce poverty. Using a survey of 606 adult taxpayers from India, South Africa, and the United States, we develop and test a theoretical model, grounded in political theory, which identifies several possible antecedents of global justice and shows that global justice attitudes are directly associated with tax compliance intentions. Furthermore, using multigroup analysis by country, we find that this association is nuanced, perhaps due to cultural differences. Compared with exchange equity, which is concerned with domestic redistribution of tax dollars, global justice attitudes are not as potent at influencing tax compliance attitudes. Implications and challenges for tax authorities are discussed.
This paper examines how mixing profit motives into corporate social responsibility (CSR) initiatives influences employee opportunism. In an online experiment, workers are randomly assigned to one of three employer initiatives: a profit-motivated business initiative with no CSR component, a purely charitable CSR initiative, or a mixed-motive CSR initiative. Workers then complete a real-effort task with the opportunity to shirk. We find that employees shirk more under mixed-motive CSR than under purely charitable CSR or a profit-motivated business initiative without CSR. This pattern is partly explained by differences in employees' moral perceptions of the employer. Workers form more favorable moral perceptions under purely charitable CSR, whereas their moral perceptions under mixed-motive CSR are similar to those formed under the business initiative without CSR. These findings suggest that mixing profit motives in CSR weakens the moral signal of CSR and undermines its internal behavioral benefits.
ABSTRACT Accounting research has shown that management responses to negative news from third parties can mitigate unfavorable investor reactions. The features of management responses that influence investor judgments, however, are unclear. This study investigates how the emphasis of management’s response interacts with the lede of negative media coverage to shape investor perceptions. Using a between-subjects experiment, we find that, when there is alignment between the media lede and management’s response emphasis, investor judgments become more favorable. The alignment enhances the persuasiveness of management’s response, leading investors to believe that the issue is unlikely to have a negative impact on future profitability. Our findings contribute to the literature on management responses by highlighting the effectiveness of aligning a company’s response with negative media coverage. In addition, we extend the psychology literature by demonstrating that the media lede is a key element to which management can tailor its response, thereby influencing investor judgments. Data Availability: Data are available from the authors upon request. JEL Classifications: M41; G11; C91.
Third-party verification rules are intended to increase compliance and can split taxpayers' evasion decision into two stages. First, taxpayers must decide to commit to full tax compliance or search for ways to avoid third-party verification. Second, taxpayers make their tax compliance decisions when filing their tax returns. We expect new rules for third-party verification will increase the use of methods that avoid third-party verification, as taxpayers want to keep their compliance options open. The choice to avoid third-party verification itself may not be unethical, but it has ethical undertones and can start taxpayers down a slippery slope of unethical decision-making. We conduct a series of experiments showing the introduction of third-party verification rules significantly increases the use of methods that avoid verification. Among those using these methods, tax evasion significantly increases. We find no evidence that overall tax evasion decreases when new third-party verification is implemented, despite regulators' intentions.
We assess the roles of moral intensity, historical audit risk (high versus low), and peer advice (to make versus not make an upward FIN 48 accrual adjustment necessary to meet earnings targets) on accountants' FIN 48 earnings management (EM) decisions. Findings suggest many accountants make accrual decisions consistent with actual audit risk rather than adhering to the 100 percent audit assumption mandate, where high (low) audit risk is associated with attenuated (exacerbated) FIN 48 opportunistic behavior. Peer advice to not make (versus make) an upward FIN 48 accrual to meet earnings targets is associated with attenuated (exacerbated) FIN 48 EM, whereas the audit and peer experimental variable interaction spurs further unethical accruals. Moral intensity harm mediates the relationship between both audit and peer experimental variables and EM behavior. We conclude with discussion and policy implications questioning the FIN 48 100 percent audit assumption mandate.
Fewer students pursuing public accounting careers threatens the profession's sustainability. Despite recent pay increases and attempts to reframe public accounting work as desirable, employee shortages persist. We employ two studies examining how students' and current professionals' perceptions of distributive justice, organizational support, and work-life balance in public accounting influence accounting students' job pursuit intentions (Study 1) and accounting professionals' commitment to public accounting (Study 2), thus addressing both attraction and retention pipeline issues. Study 1 utilizes a 2 (pay: average or above average) x 2 (work-life balance: poor or good) experiment, whereas Study 2 surveys public accounting employees. Moderated serial mediation findings show the relation between pay and job pursuit intentions (Study 1) and commitment (Study 2) is mediated by perceptions of distributive justice and organizational support. Finally, student perceptions of distributive justice and organizational support are significantly more important factors when work-life balance in public accounting firms is poor.
The growing demand for CSR information has made CSR reporting an important component of corporate disclosure. This study investigates two prevalent features of CSR reports. Using experimental methodology, we examine whether CEO image presentation, specifically casual versus formal attire, interacts with a firm's CSR strategy frame (global versus community) to influence investors' information processing and investment intentions. We find that portraying a CEO in casual attire alongside a globally focused CSR strategy increases investors' CSR information weighting, which in turn enhances their willingness to invest. We also discuss potential mechanisms that underlie this relationship. Overall, this study demonstrates that CEO image presentation is a consequential visual cue in CSR disclosures, shaping investor perceptions, information weighting, and investment decisions, and provides practical implications for firms and market participants.
This study utilizes a large proprietary audit hour dataset from Korea to examine target ratcheting (the practice of adjusting future targets based on prior performance) and the ratchet effect (how employees react to target ratcheting) within the audit industry. We test whether previous findings (e.g., Ettredge et al. 2008) hold in a larger dataset covering both Big 4 and non-Big 4 firms. Consistent with the target ratcheting theory, we find empirical evidence of target ratcheting across all firms. However, unlike Ettredge et al. (2008), our results do not indicate the presence of asymmetric ratcheting. We also find that audit hours increase following favorable budget variances (i.e., actual < budgeted hours), consistent with the ratchet effect. Finally, although higher budgeted audit hours are associated with greater audit quality as measured by absolute discretionary accruals, we do not find evidence that increases in actual audit hours are associated with improved audit quality.
Certain audit issues could recur across multiple periods resulting in repeated critical audit matter (CAM) disclosures over time. Although the negative effect of a first-time CAM disclosure on investors' judgments is well established, little is known about the effect of CAMs when these disclosures are repeated. We experimentally examine the effect of CAM repetition on investors. We predict and find that a repeated CAM disclosure loses its prominence and has a smaller negative effect on investment judgments. Our additional analyses from a withinparticipants setting suggest that making the CAM repetition salient changes how investors perceive the reasons for the repetition, but does not change the effect of repetition on their investment judgments.
Firms must disclose the performance metrics used to determine executive compensation and whether these metrics are chosen before or after a performance period. We investigate investor reactions to these disclosures and whether investors' reactions reflect their belief in executives' ability to influence their pay. Despite board concerns to the contrary, we find that investors do not always punish a firm for using ex post compensation discretion rather than ex ante targets to determine executive compensation. Instead, investors are indifferent to the timing of choosing performance metrics when the metrics are more objective. Also, investors are not opposed to the use of more subjective metrics, provided they are chosen before the performance period. Thus, deviations from executive compensation norms may receive more leniency from investors provided boards attend to the conditions in which each type of contract is likely to be viewed by investors as evidence of managerial rent extraction.
Subjective performance evaluation (SPE) has become a prevalent method for assessing employee performance in creative group tasks. However, the role of intragroup competition in SPE remains unclear. This study experimentally examines how SPE frameworks impact performance in creative tasks by varying levels of intragroup competition through a forced rating system (FRS), which reflects higher competition, and an unrestricted rating system (URS), which reflects lower competition. Our findings demonstrate that groups operating under an achieve higher creative performance than those under a URS, outperforming them in both idea generation and selection. A post-experimental video analysis of collaborative behaviors indicates that heightened competition, facilitated by an FRS, reduces free riding and increases speaking time and verbal interruptions, thus promoting more dynamic and productive idea generation and selection process.
Professional tax accountants are expected to serve clients with objectivity and advocacy. This study examines how tax professionals' judgments and decisions are influenced by their attributions relating to a client's reason for entering into a taxable transaction and the professional's resulting affective reaction in the form of sympathy. In an experiment with experienced tax professionals, we adapt the conceptual foundations of attributionaffect-action theory to predict and find that a professional's affective reaction to a client's reason for entering a taxable transaction can have a non-normative influence on the professional's evidential support assessments and client recommendations. This influence has the potential to undermine professionals' ability to adhere to professional standards that require objective assessments of the strength of a tax position and the potential to directly and indirectly influence recommendations in ways that expose the client to more (or less) risk than the technical merits of the position would suggest.
In a setting where employees can substitute economically costly effort with economically costless misreporting, we predict that prosocial incentives that promote a moral decision frame, compared with cash incentives that promote an economic decision frame, could theoretically motivate less misreporting, although the effects on effort are less certain. Using an experiment, we find that employees who misreport more also tend to choose lower effort. We also find that the variable prosocial contract results in lower reported output and less effort than the variable cash contract, in contrast to the insignificant differences in these variables between the fixed prosocial contract and the fixed cash contract. Lastly, we find that the variable prosocial contract results in lower misreporting than the variable cash contract when we control for the simultaneous effort choice, but not when we do not control for effort. We outline implications of these results for theory and practice.
Organizational culture and performance-based rewards are integral components of an organization's managerial control system. Despite their importance, research on performance-based rewards within the context of organizational culture remains limited. Our study aims to fill this gap by examining how organizational culture interacts with frequency of performance-based rewards to influence performance misreporting, a prevalent agency problem in corporate settings. Using an experiment, we predict and find that performance misreporting is lower in a learningfocused (mastery orientation) culture compared to a performance-focused (performance orientation) culture. Additionally, we predict and find that performance-based reward frequency interacts with organizational culture to influence the level of misreporting. Specifically, our study highlights that a high reward frequency diminishes the potential benefit that a mastery orientation culture offers in curbing misreporting behavior.
When working to get new employees up the learning curve quickly, managers might be tempted to deliver task-related feedback early in the learning process rather than spacing it evenly over time. Using a laboratory experiment, we investigate how early versus evenly distributed task-properties feedback affects learning and performance, and how the presence of workplace interruptions influences these outcomes. Utilizing Cognitive Load Theory, we predict and find that evenly distributed feedback leads to better learning and performance than early distributed feedback, and this effect is more pronounced with significant workplace interruptions. Thus, our study suggests managers should resist the temptation to accelerate task feedback for new employees and instead provide it more steadily over time.
Prior research (e.g., Fatemi, Hasseldine, and Hite 2008) provides evidence of a resistance effect to framing in tax settings. We examine whether source credibility (or lack thereof) mitigates (exacerbates) this resistance effect in situations that are inherently political in nature (e.g., taxation, health care). Political partisanship in the U.S. has dramatically impacted how information seekers view source credibility such that social identity and political tribalism are often more influential in assessing credibility than the actual underlying knowledge base of the messenger. To explore this phenomenon, we use an experiment focused on the Net Investment Income Tax (i.e., a tax system that helps fund the Affordable Care Act (ACA)). We find that, when participants read a positively framed statement attributed to a credible source (i.e., one that syncs with the respondent's political party), they reconsider their negative prior attitudes. Thus, we provide evidence that source credibility moderates the resistance effect.
In two experiments, we demonstrate that the communication medium of voluntary disclosures can influence investors' information search decisions, which can affect their attention to mandatory disclosures. In an information search setting relating to an investor relations website, our experiments manipulate the format of voluntary disclosure (text or video) and the valence of the information (positive or negative) contained in mandatory disclosures. Our results indicate that investors are more likely to search for voluntary disclosures when they are in a video format. A significant interaction emerges where the news valence in mandatory disclosures is less influential on investors' judgments when voluntary disclosures employ a video format compared with a text format. This demonstrates that the communication medium of voluntary disclosures can influence investors' attention to and their processing of mandatory disclosures. Our study contributes to the literature on financial disclosure, disclosure characteristics, and investor behavior.
We investigate when and how irrelevant peripheral information, such as advertisements, affects investors' processing of nearby financial information in an online environment. We develop a theory-based framework that predicts that irrelevant peripheral information will affect investors' processing of nearby financial information when it distracts investors or induces negative investor mood. We conduct a series of experiments that test our framework. Specifically, we examine the effects of a type of peripheral information ubiquitous on popular online financial websites-advertisements-and find that neutral product advertisements in the periphery of web pages do not affect investors' processing of nearby financial information. Eye-tracking data reveal that this effect stems from investors' ability to avoid looking at such ads. However, we also find that advertisements that induce negative mood cause investors to interpret nearby financial information more negatively and be less willing to invest.
Earnings management (EM) is permissible when it complies with GAAP, but managers' perceptions of its ethicality vary. We theorize that codes of ethics and ethical beliefs shape managers' view of the ethicality of EM and their use of justification. We then investigate how both ethical frameworks interact with justification to influence EM. We examine a setting where managers can justify that the company will also benefit from EM. We find that instead of constraining EM, rules-based codes accentuate it when the company also benefits. The effect is not observed for consequences-based codes. We also find that managers whose ethical beliefs predispose them to seek justification when they see EM as dishonest are more likely to manage earnings when the company also benefits. Implications for the design of codes and manager training and selection are discussed.
