Juan Zhu Donghua Chen
In China, the Confucian value system with benevolence and justice as the core and the governance proposition based on moral governance had been basically finalized in the pre-Qin period, providing ideological support for traditional Chinese moral governance (Li Feng, 2018), and also receiving high attention in modern Chinese society (Xiang Yuqiao, 2016; Wu Chanxin, 2019). In modern Chinese society, moral governance is an indispensable governance means and driving force to promote the modernization of the national governance system and governance capacity (Long Jingyun, 2015). It is worth noting that Chinese society, influenced by the governance thought of “virtue is the principal, punishment is supplemented, and rites and laws are combined” in traditional Chinese culture, not only advocates the promotion of people’s inner virtue through education, self cultivation and moral practice, but also emphasizes the selection of virtuous and capable people to participate in governance. However, the agency theory (Jensen and Meckling, 1976), which lays the foundation for the study of corporate finance and corporate governance, is based on the assumption of “economic man” and holds that the agent’s self-interest after the separation of ownership and control rights will lead to agency conflicts and agency costs. Although Smith (1776; 1759) has long pointed out that egoism and altruism are the two basic motivations for human behavior, because it is difficult to change human nature, agency theory only focuses on the role of institutional structure, contracts and informal arrangements in reducing agency conflicts and increasing the interests of both parties to the transaction (Jensen, 1994). However, as for the role of personal morality, some studies have pointed out that personal morality in the exchange link of economic activities is conducive to correcting the excessive profit-seeking motive of exchange, reducing the opportunistic behavior caused by information asymmetry in the exchange process, and reducing transaction costs (Wang Xiaoxi and
Yang Wenbing, 2002; Hua Guihong and Wang Xiaoxi, 2004. As a self-motivation and restraint mechanism,
personal morality can provide the internal incentive and restraint of individual behavior and make up for the
deficiency of external system (Wesson, 2002; Liu Liangbi and Liu Minggui, 2001; Wang Xiaoxi and Yang
Wenbing, 2002; Hua Guihong and Wang Xiaoxi, 2004; Li Yining, 2010; Yu Dahuai, 2013). In addition, relevant
research in the field of corporate governance have also pointed out that individual managers will become “moral
people” with a certain level of morality in the process of their growth and socialization under the influence of
their social culture, and the self-motivation and restraint of managers’ ethics enable them to play an important
role in reducing agency conflicts and improving corporate governance efficiency (Chen Donghua et al., 2017;
Zhu Juan and Chen Donghua, 2024). However, due to the difficulty in quantifying managers’ morality, the
existing research on corporate finance and corporate governance, which is mainly based on the empirical research
paradigm, has not directly tested the role of managers’ personal characteristics such as managers’ morality. This
provides an opportunity for further empirical research on the governance function of managers’ morality.
Accounting information is the key basis for internal and external information users of a company to
make decisions. Its quality will exert an important influence on the decision-making efficiency of information
users, especially external information users of a company, and thus exert an important influence on the normal
operation and healthy development of the capital market and market economy. Therefore, research on the quality
of corporate accounting information is an important issue in the research on corporate finance and corporate
governance (Lu Dong et al., 2012; Ruan Rui et al., 2021; Liu Guangqiang and Wang Di, 2021). Most existing
studies believe that the behavior of managers who control the operation of a company in accounting information
disclosure is an important factor affecting the quality of accounting information, and managers who aim to
maximize their own interests will hide the real accounting information in accounting information disclosure
and reduce the quality of accounting information of the company (Healy, 1985; Sweeney, 1994; DeFond and
Jiambalvo, 1994; Guidry et al., 1999; Jin Ming, 2000; Cheng and Warfield, 2005; Bergstresser and Philippon,
2006; Li Yanxi et al., 2007; McAnally et al., 2008; Su Dongwei and Lin Dapang, 2010; Jayaraman and Milbourn,
2015; Hsieh et al., 2018). These studies regard managers as “economic men” who seek to maximize their
own interests, ignoring their personal morality and its possible role. Deng Deqiang et al. (2014) and Chung
and Hsu (2017) studied the restraining effect of individual moral cognition on individual behavior from the
perspective of individual moral cognition, and found through experimental research, individual moral cognition
can significantly promote honest behavior in budget reporting and management reporting so as to restrain
budget slack and reduce the damage to corporate interests. However, the level of individual moral cognition is
not completely equivalent to the level of individual morality. Based on the existing relevant studies, this paper
intends to directly study the influence of managers’ morality on the quality of corporate accounting information
disclosure by using experimental research methods based on the Chinese sociocultural context.
Therefore, the first question facing this paper is whether a measurement tool can be found in the
experimental research to effectively measure the morality of managers in the social and cultural background of
China. As for the measurement of personal morality, among the existing relevant measurement methods, the Scale of Moral Behavior and the Scale of Controversial Moral Behavior can be used to measure the moral status
of the subjects to a certain extent (Retting and Pasamanick, 1959; Harding and Phillips, 1986). In addition,
the Defining Issues Test (DIT), proposed by Rest (1979) and revised by Thoma et al. (1999), can be used to
infer the stage of moral cognitive development of test subjects according to their answers. The Moral Identity
Measure (MIM) compiled by Aquino and Reed (2002) sets measurement items from two dimensions, implicit
and explicit, to measure the moral identity of the subjects. Among them, implicit identity refers to the importance
of moral traits in the self-scope. Explicit identification reflects the extent to which individuals display these
traits in social behavior through personal behaviors such as dress, hobbies, and behavior. However, as Yang
Zhongfang put it in the preface to his translation of Personality and Psychosocial Measurement (Robinson
et al., 1997), “The conception and production of the scale have their specific historical, cultural and social
backgrounds and limitations; the questions in the scale reflect the common concerns of everyone in a certain era
and a certain society and culture. For people in the context of Chinese social history and culture, these tests may
cause difficulties in understanding, and may not be able to measure the concept that they really want to measure
because the subject thinks that the content of the test is irrelevant.” In order to effectively assess adult morality
under Chinese social and cultural background, based on the connotation of personal morality in Chinese social
and cultural context, this paper develops the Personal Morality Scale to measure the moral level of subjects who
simulate the role of managers in the experiment.
On the basis of the above, this paper studies the influence of the moral level of the subjects in the role
of simulated managers on the possibility of hiding real accounting information by simulating the situation
of managers’ accounting information disclosure decisions with conflicts between managers and shareholder
agents. The research finds that, under the control of other conditions, the higher the moral level of managers,
the less likely they are to hide the true accounting information, so the higher the quality of corporate accounting
information disclosure. Further, the study examines the influence of managers’ morality on external governance
mechanisms. It is found that the higher the managers’ moral level, the smaller the role of external supervision
mechanism in reducing the possibility of managers hiding true accounting information, and the smaller the role
of managers’ shareholding in reducing the possibility of managers hiding true accounting information, that is,
managers’ morality will significantly replace the role of external governance mechanism. In addition, in order
to explore whether managers’ morality can also affect their decision-making behaviors other than accounting
information disclosure, so as to further clarify the role that managers who control the company’s operation can
play in corporate decision-making related to the interests of external investors, this paper also studies the impact
of managers’ morality on their investment decisions and thus on the investment efficiency of the company. It is
found that under other conditions, the higher the managers’ moral level is, the less likely they are to over-invest
and under-invest, and the higher the investment efficiency of the company.
The possible research contributions of this paper are as follows: (1) Focusing on the quality of
corporate accounting information disclosure, this paper provides direct empirical evidence for the role of
managers’morality in corporate governance by constraining their behaviors and alleviating agency conflicts,
and forms an important supplement to existing relevant studies (Chen Donghua et al., 2017; Zhu Juan and Chen Donghua, 2024). At the same time, it also provides direct empirical evidence that managers’ morality can affect
the role of external governance mechanism, which indicates that managers’ morality can partially replace external
governance mechanisms and become an important internal governance mechanism to restrain managers’ behavior
and alleviate agency conflicts. This research conclusion contributes to a better understanding of agency conflict
and corporate governance in China’s social and cultural context. At the same time, it partly explains why North
(1990) said that in different countries, legal systems play different roles in restricting people’s behavior, reducing
transaction costs and promoting economic performance. (2) This paper directly discusses the moral level of
managers and their role in governance, which is an important echo of relevant studies on butler theory. According
to the butler theory, managers are not always opportunists pursuing the maximization of their own interests, but
in some cases are dutiful “stewards”, whose behavior is driven by a sense of accomplishment and mission, and
aims to pursue the maximization of the interests of the client (Miller and Le Breton-Miller, 2006; Miller et al.,
2008; Dominguez-Escrig et al., 2019), therefore, governance strategies guided by the butler theory are different
from those guided by the agent theory. According to the butler theory, the key to corporate governance is not that
owners supervise and control managers or give managers material incentives, but that owners trust managers and
encourage managers to maximize their enthusiasm and creativity through authorization, coordination or spiritual
incentives to create more value for the company or owners (Donaldson, 1990; Donaldson and Davis, 1991; Davis
et al., 1997; Muth and Donaldson, 1998; Sundaramurthy and Lewis, 2003). This paper has formed an important
echo with these studies of butler theory, and further combined with the social and cultural background of China,
from the perspective of managers’ moral level, the governance logic of managers’ morality is systematically
discussed and empirically tested. (3) By developing the Personal Morality Scale to measure the moral level of
the subjects who simulated the role of managers in the experiment, this paper makes it possible to directly test
the governance role of managers’ morality under experimental conditions, and provides reference for subsequent
relevant studies. At the same time, the use of experimental research methods can control the influence of non
research concerns on the research conclusions more accurately by controlling the experimental situation, making
the research conclusions more credible and providing reference ideas and directions for future related research.
