Conflicts of Interest, Disclosure, and (Costly) Sanctions: Experimental Evidence

Church, Bryan K.; Kuang, Xi

doi:10.1086/596117

Cited by 37 publications

(28 citation statements)

References 40 publications

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“…It would be a mistake, however, to conclude that disclo-sure is always counterproductive, as some recent laboratory research illustrates (Church and Kuang 2009;Koch and Schmidt 2009). Research on practical examples of disclosure, summarized in Full Disclosure (Fung, Graham, and Weil 2007), also shows that disclosure can have real beneficial effects.…”

Section: A Policy-oriented General Discussionmentioning

confidence: 99%

“…In all three lines, disclosure leads to greater discounting across the board, as signified by their shift downward. When disclosure of the advisor's conflict of interest will lead the advisor to show greater restraint (Church and Kuang 2009), the response curve will shift to the left. If disclosure leads to exaggeration, the peak shifts to the right.…”

Section: Psychological Mechanismsmentioning

confidence: 99%

See 1 more Smart Citation

When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest

Cain¹,

Loewenstein²,

Moore³

2011

J Consum Res

160

104

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Disclosure is often proposed as a remedy for conflicts of interest, but it can backfire, hurting those whom it is intended to protect. Building on our prior research, we introduce a conceptual model of disclosure’s effects on advisors and advice recipients that helps to explain when and why it backfires. Studies 1 and 2 examine psychological mechanisms (strategic exaggeration, moral licensing) by which disclosure can lead advisors to give more-biased advice. Study 3 shows that disclosure backfires when advice recipients who receive disclosure fail to sufficiently discount and thus fail to mitigate the adverse effects of disclosure on advisor bias. Study 4 identifies one remedy for inadequate discounting of biased advice: explicitly and simultaneously contrasting biased advice with unbiased advice.

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Section: A Policy-oriented General Discussionmentioning

confidence: 99%

Section: Psychological Mechanismsmentioning

confidence: 99%

When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest

Cain¹,

Loewenstein²,

Moore³

2011

J Consum Res

160

104

View full text Add to dashboard Cite

show abstract

“…Church and Kuang (2009) show that coupling disclosure with sanctions against advisors who are caught giving self-interested advice greatly reduces advisors' strategic exaggeration. Koch and Schmidt (2010) find that with repeated advisor-client interactions, advisors' reputational concerns also decrease strategic exaggeration.…”

Section: Advice and Disclosurementioning

confidence: 98%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

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This chapter provides an overview of household finance. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: consumption and savings, borrowing, payments, asset allocation, and insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: education and information, peer effects and social influence, product design, advice and disclosure, choice architecture, and interventions that directly target prices or quantities. This chapter is divided into two parts, each of which is further divided into several sections. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing both extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: (I) consumption and savings, (II) borrowing, (III) payments, (IV) asset allocation, and (V) insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: (VI) education and information, (VII) peer effects and social influence, (VIII) product design, (IX) advice and disclosure, (X) choice architecture, and (XI) interventions that directly target prices or quantities. The final section of the paper (XII) concludes. John BeshearsWe offer broad coverage of the household finance literature, but we limit the scope of our discussion along some dimensions. We focus on the U.S. institutional context and on empirical work based on U.S. data, although we do bring evidence from other wealthy countries to bear when germane and occasionally reference evidence from developing countries. We address household asset allocation but do not draw out its implications for asset pricing, which are covered by the asset pricing chapter in this handbook. Although household decisions regarding health care are relevant to household finance, we largely omit this literature from our chapter because it is covered in depth in the chapter on behavioral health economics. Finally, there is some overlap between our section on financial product design and the chapter on behavioral industrial organization; we refer readers to that chapter for related material on that topic. Part 1: Facts I. Consumption and SavingsBeginning with the seminal work of Modigliani and Brumberg (1954) and Friedman (1957), economists have embraced the view that households choose to save and borrow to smooth consumption over the lifecycle. Intuitively, if agents have concave utility functions over consumption, then they should spread consumption across time to optimally...

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“…Jamal et al (2016) use professional valuation specialists as participants, and they find results consistent with psychological licensing; participants' estimates are more biased toward their conflicted interest when they disclose such conflict to users of their opinion. But, like other conflict of interest studies (e.g., Cain et al 2005;Church and Kuang 2009;Koch and Schmidt 2010), participants in Jamal et al (2016) received direct financial compensation for misleading users. 5 In our experimental setting, as in the natural audit setting, neither reporting a material weakness nor opining on the financial statements directly links to auditor monetary incentives; moreover, auditor reporting of a material weakness does not represent a disclosure of conflict of interest.…”

Section: Unintended Consequences Of Reporting Materials Weaknesses In mentioning

confidence: 99%

The Unintended Consequences of Material Weakness Reporting on Auditors' Acceptance of Aggressive Client Reporting

Bauer

Bucaro

Estep

2019

The Accounting Review

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Regulators are concerned that auditors do not sufficiently identify and report material weaknesses in internal control over financial reporting (ICFR). However, psychological licensing theory suggests reporting material weaknesses could have unintended consequences for acceptance of aggressive client financial reporting. In an experiment, we predict and find auditors accept more aggressive client reporting after they report a material weakness in ICFR than after they report no material weakness. We provide evidence licensing underlies this effect. In a second experiment, we investigate the efficacy of an intervention to reduce the identified licensing effects by prompting an audit quality goal. We find this prompt mitigates the unintended consequence when auditors report a material weakness. While regulators are concerned companies are undeservedly receiving clean ICFR audit opinions, our findings indicate adverse ICFR opinions may lead auditors to give companies undeservedly clean financial statement opinions. We provide a potential remedy to this unintended consequence.

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Conflicts of Interest, Disclosure, and (Costly) Sanctions: Experimental Evidence

Cited by 37 publications

References 40 publications

When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest

When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest

Behavioral Household Finance

The Unintended Consequences of Material Weakness Reporting on Auditors' Acceptance of Aggressive Client Reporting

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