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An International Meeting of American Accounting
Association
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An Experimental Investigation of Trust and Justice: Implications for Corporate Governance |
Amy K. Choy
University of Alberta
Ronald R. King
Washington University
Abstract: Accounting scandals have been associated with reduced investors’ trust in recent years. The Sarbanes-Oxley Act of 2002 (SOX) was passed to rebuild trust and restore confidence in the accounting profession. We develop hypotheses about trust formation based on theories of justice and test them with an experiment extending Berg, Dickhaut and McCabe (1995). While the psychology literature reports that subjects who made decisions in a system perceived to be fair (high procedural justice) remained trusting even after a bad outcome (low distributive justice), we find instead that high procedural justice does not help to maintain trust when outcomes are bad. We also find that fair procedures increase trust only after subjects experience favorable outcomes. This implies that trust restoration depends on both fair systems and better outcomes. The success of SOX will be limited if the return to investors does not increase (due to high implementation costs).