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This paper reports the results of three studies (archival, experimental, and qualitative) designed to examine the effects of auditor narcissism on auditor‐client negotiations in China. We contend that narcissistic characteristics fuel auditors' competitiveness and embolden them to stand firm in negotiations, potentially lengthening the negotiation process but leading to more conservative negotiation outcomes. As predicted, our archival results suggest that auditor narcissism is positively associated with audit delay and negatively associated with clients' absolute and positive discretionary accruals. Our experimental results document that narcissistic auditors are more likely to be involved in negotiations that reach an impasse or take longer to resolve and that narcissistic auditors negotiate reported asset values that reflect less aggressive reporting choices. Our qualitative results from field interviews with practicing audit partners corroborate our archival and experimental findings. Overall, the data collected using three different research methods yield consistent results in support of our theory. Our findings shed light on factors that influence audit efficiency and quality in China. We discuss the key cultural and contextual differences between China and the West as well as the implications of these differences for future research.

This paper investigates the effect of vivid language on investor judgments. Recent research finds that investor judgments are significantly influenced by disclosure tone (positive versus negative). Holding tone constant, we investigate investors’ reactions to vivid versus pallid information. Drawing on theories from psychology, we predict that investors will be sensitive to the differences between vivid and pallid language when the underlying information is preference inconsistent, but not when the information is preference consistent. Results of two experiments support our prediction. Vivid language significantly influences the judgment of investors who hold contrarian positions (i.e., short investors in a bull market and long investors in a bear market). Interestingly, vivid language has limited influence on the judgment of investors who hold positions consistent with the general tenor of the market. Our results provide evidence regarding when vividness matters and when it does not in financial contexts, thereby contributing to both psychology and a growing literature on disclosure tone in financial reporting. In addition, our results also speak to concerns raised by regulators and academics asserting that vivid language can inflate bubbles and incite panics.

Optimal agency contracts pay the lowest wage necessary to induce the effort necessary to maximize firm profit. Employees could view such contracts as violating the reciprocity norm because they offer a low wage in exchange for expected high effort. Consequently, the profit-maximizing effectiveness of optimal contracts could be impaired if employees punish firms offering the optimal contract by reducing their effort or rejecting the contracts in favor of more reciprocal contracts. We conduct three experiments using experimental labor markets to examine 1) how employees respond to being offered an optimal agency contract versus a theoretically suboptimal reciprocity-based contract when each contract is the only contract available in the market, 2) how employees respond to these two contracts in a market where firms choose which one to offer, 3) whether firms' contract offers depend on employees' reactions to those contracts, and 4) how employees and firms react to a contract that incorporates important features of both the theoretically optimal contract and the reciprocity-based contract. We find that the theoretically optimal contract is less effective than standard economic analysis predicts, and that a theoretically suboptimal reciprocity-based contract can be as effective. We also find that a new hybrid contract that incorporates the "forcing" feature of the optimal contract and the "reciprocity" feature of the sub-optimal contract can be more effective than either of these contracts alone. Overall, these results suggest that incorporating preferences for reciprocity into theoretical models can yield employment contracts and control systems that are more descriptive of current practice and potentially more useful as guides to practice.2

We experimentally investigate how managers' decisions to invest discretionary resources in the company's corporate social responsibility (CSR) initiatives are affected by whether the investment decision is denominated in financial or nonfinancial measures (i.e., the measurement basis used for decision making). We posit that nonfinancial measures bring attention to the society-serving nature of CSR investments, thus activating the pro-CSR social norms of the company and managers' personal CSR norms. Norm activation, in turn, influences managers' investment decisions to the extent that social norms are congruent with personal norms. As predicted, we find that the level of CSR investment is higher under a nonfinancial measurement basis than under a financial measurement basis, but only when the manager is personally supportive of CSR. Supplemental analysis indicates that CSR-supportive managers continue to invest more under a combined financial/nonfinancial measurement basis than under a financial measurement basis only. Theoretical and practical implications are discussed. JEL Classifications: C91; M41.

Conflicts of interest may compromise individuals' independence in providing advisory services. Full disclosure is a commonly recommended remedy for the adverse effect of conflicts of interest. Yet prior study shows that disclosure may not have the intended effect because it provides individuals with moral license to engage in self-interested behavior, thereby exacerbating biases. We follow up on this research and seek to determine whether other institutional factors may negate the potentially harmful effects of disclosure. We conduct a laboratory experiment, focusing on behavior in an investor/financial adviser dyad, including important representative features in this setting. Our results suggest that disclosure is not necessarily detrimental. We find that investors are better off when conflicts of interest are disclosed and sanctions are available, even though initiating sanctions is costly to investors. Under such conditions, advisers' bias is dampened markedly. (c) 2009 by The University of Chicago. All rights reserved..

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