Working Paper: CEPR ID: DP13207
Authors: Rajna Gibson; Matthias Sohn; Carmen Tanner; Alexander F. Wagner
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.
Keywords: earnings management; honesty; investor preferences; investor segmentation; protected values; social value orientation; trust
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CEO's perceived commitment to honesty (M12) | Investors' perception of CEO's honesty (G40) |
| Earnings management (M52) | CEO's perceived commitment to honesty (M12) |
| Investors' perception of CEO's honesty (G40) | Importance assigned to claimed future returns (G17) |
| Moral values (A13) | Investment decisions (G11) |
| Proself investors' moral values (A13) | Investment decisions (G11) |
| Prosocial investors' moral values (A13) | Investment decisions (G11) |