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Disclosure, Sanctions, and Conflicts of Interest: Experimental Evidence
Bryan K. Church, Georgia Institute of Technology
Jason Kuang, Georgia Institute of Technology
ABSTRACT. Conflicts of interest may compromise the independence of financial analysts and auditors in providing professional services. Full disclosure is a commonly-recommended remedy for the adverse effect of conflicts of interest. Yet prior study suggests that disclosure may exacerbate advisers' bias because it provides advisers with moral license to engage in self-interested behavior. The purpose of this study is to investigate whether other factors negate the potentially harmful effects of disclosure. We conduct an experiment focusing on behavior in an investor/financial adviser dyad involving conflicts of interest. We manipulate the disclosure of conflicts of interest and the availability of sanctions. Our results show that neither disclosure nor sanctions, in isolation, can sufficiently reduce advisers' bias. However, disclosure and sanctions, in combination, dampen advisers' bias. Because bias is lessened under such conditions, investors' assessments of value are more accurate.
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