Sacred values in financial economic decision-making: Experimental evidence

Rajna Gibson, Carmen Tanner and Alexander Wagner
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Rajna Gibson: University of Geneva and Swiss Finance Institute
Carmen Tanner: University of Zurich

No 08-48, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Seminal work in finance, economics, and psychology has documented that individuals tell the truth more often than standard economic models predict. But researchers have so far only indirectly inferred a preference for truth-telling from agents’ observed behavior. Using experiments, we explore finer predictions of a theory of managerial decision-making that considers the possibility that some agents may consider truth-telling as a “sacred value.” We study this value in the context of earnings management. We find that individuals who have a strong commitment to truth-telling are more likely to forgo monetary gains in favor of telling the truth about the earnings of their firm. While most subjects react to costs of truth-telling,those with stronger sacred values for truth-telling react less. We also find that subjects with stronger sacred values for truth-telling react less to social norms. By contrast, our measured sacred values for truth-telling have no predictive power for how the same individuals behave in a pure effort-based task which does not require any moral judgments. These findings as well as the robustness analysis we conduct strongly support causality between sacred values and value-related decision-making in finance, rather than spurious self-consistency. We argue that these experimental results have wide-ranging implications for financial research and for practice, in particular for the selection of managers, the design of managerial incentives, and the design of regulation.

Keywords: Ethics; earnings management; incentives; sacred values; social norms (search for similar items in EconPapers)
JEL-codes: C91 D03 G30 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2008-12
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0848

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