The literature reviewed in the previous section indicates that information credibility is assessed differently in different settings, but one factor that appears across all settings is source credibility. Literature from wide-ranging disciplines, including social science, psychological science, web communication, media communication, marketing and accounting, provide substantial evidence of source credibility effects in facilitating voluntary acceptance of decisions, attitude changes and behavioural compliance (Suzuki 1978; Birnbaum and Stegner 1979; Bamber 1983; Albright and Levy 1995; Beaulieu 2001; McKnight and Kacmar 2007). For example, in psychology, Suzuki (1978) finds that perceived higher source credibility is significantly persuasive in affecting one’s judgement on whether to accept or reject information. Similarly, Albright and Levy (1995) find that feedback from higher source credibility receives more favourable evaluations in decision-making.
In the context of financial information research, the findings provide insights into the effects of source credibility in reducing the judgement of information risk. Beaulieu (1994) examines source credibility effects on loan application assessment and finds that perceived higher source credibility increases the likelihood of loan application approval. Beaulieu (1994) uses the differences in loan applicants’ character to send positive or negative signals on source credibility. Bamber (1983) investigates the effects of source
credibility among audit members and finds that auditors’ perceptions of information credibility are sensitively linked to source credibility. Bamber (1983) finds that even a minor difference in source credibility tends to influence judgement on information reliability. In another study, Beaulieu (2001) examines the effects of source credibility in increasing the reliability of management assertions of financial reporting information. Beaulieu (2001) finds that lower perceived source credibility of management tends to increase auditors’ assessments of misstatement risks, as reflected in audit fees. Beaulieu (2001) suggests that poor management credibility affects auditors’ perceptions on the extent of ‘fair and full disclosure’ of the financial reporting information.
2.3.2.1 Source Credibility Theory and Social Trust
The notion of source credibility was raised by Aristotle, who suggested that ‘ethos’, or a person’s character, along with ‘logos’ (logic) and ‘pathos’ (emotion) influence the persuasiveness of a speaker’s rhetoric (Aristotle 1954). Source credibility was reintroduced in modern literature by Hovland et al. (1953) as having two dimensions: ‘expertness’ and ‘trustworthiness’. Subsequent research suggests that source credibility dimensions might incorporate other factors, such as likeability, authority and goodwill (e.g., McCroskey and Teven 1999), but the prevailing view is that source credibility can be assessed consistent with Hovland et al. (1953), using expertise or competency and trustworthiness (Pornpitakpan 2004).
Hovland et al. (1953, p. 21) define expertise as ‘the extent to which a communicator is perceived to be a source of valid assertion’. The expertise dimension can be assessed from factors that infer the extent of the source’s knowledge, skill, competency, education, training and experience (Birnbaum and Stegner 1979; Tseng and Fogg 1999). The second component of source credibility—trustworthiness—refers to ‘the degree of confidence in the communicator’s intent to communicate the assertions what considers as most valid’ (Hovland, Janis and Kelley 1953).
While most research on source credibility indicates that both the expertise and trustworthiness dimensions are persuasive, McGinnies and Ward (1980) find that trustworthiness may be important in enhancing credibility. McGinnies and Ward analyse the significance of the expertise and trustworthiness components using between-countries and within-countries analyses in four different countries: the US, New Zealand, Australia
and Japan. They find that source trustworthiness is relatively persuasive in influencing source credibility. Birnbaum and Stegner (1979) argue that trustworthiness affects the source’s communication by reducing the expectation that the information communicated might be incorrect and therefore perceived as more believable.
Credibility research associated with sources often involves the concept of trust, which is argued to be influenced by the judgement of motives (Hovland, Janis and Kelley 1953; Broudy 1981; McCroskey and Teven 1999) and responsibility (Earle and Cvetkovich 1995). Broudy (1981) suggests that credibility relates more to motives—in particular, whether they are good or bad, not true or false. This is because bad motives are likely to lead to bad consequences (Broudy 1981). The effects of motive on trustworthiness are also emphasised by Hovland et al. (1953), who refer to it as the source’s ‘intention towards receiver’.4 Aristotle posits that:
We believe good men more fully and more readily than others: this is true generally whatever the question is, and absolutely true where exact certainty is impossible and opinions are divided.5
Aristotle views that a speaker’s ethos is not only central to influencing trustworthiness, but it is also persuasive in reducing uncertainty that affecting the reliability of their statements.
Salient work, which investigates the role of source credibility in a financial context is Beaulieu (1994, 2001), which have been discussed in previous section. In summary, Beaulieu (1994, 2001) research finds that source credibility influences perceived information risk. However, Beaulieu’s research deals with an environment, in which the receiver has more direct engagement with the source. This contrasts with the challenges in capital markets, where investors process multiple information cues from various sources and have no direct connection with most sources. Thus, the persuasiveness of source credibility is less established.
4 Hovland, Janis and Kelley (1953) subsume the source’s intention towards the receiver under the dimension of trustworthiness.
2.3.2.2 Social Trust
The role of social trust in facilitating decision-making has been widely discussed in literature relating to transaction cost economics, management, psychological science and sociology (Bradach and Eccles 1989; Bromiley and Cummings 1989; Kramer and Tyler 1996; Fombrun, Gardberg and Barnett 2000). Distrust is pervasive in business relation due to separation roles in a corporation. Thus, trust serves as an important element in making organisations functional and durable in dealing with challenges (Burt and Knez 1996). Research shows that trust is correlated with other important variables—for instance, a ‘manager’s beliefs and philosophies’ (Creed et al. 1996) and cooperative behaviours within the organisation’s networks (Zucker et al. in Kramer and Tyler 1996). Trust, which is interchangeably referred to as social trust because it is essentially a socially contextualised decision (Kramer and Tyler 1996), is defined as the expectation that one’s interests will not be taken advantage of by others (Earle and Cvetkovich 1995; Kramer and Tyler 1996). Earle and Cvetkovich (1995) argue that this definition tends to link social trust to judgement of responsibility. Findings from moral development studies show that trust can be conceptualised as ‘orientation towards society and towards others’ (Staub 1978; Rushton 1980 as cited in Kramer and Tyler 1996).
Social trust is generally influenced by two societal variables: perceived similar characteristics and reciprocal experience (Creed et al. 1996; Good 2000). Trust by perceived similar characteristics or incentives is induced by the identification of sharing a similar social group (Brewer and Kramer 1985). Brewer and Kramer (1985) examine the effect of social group identification on trust judgement and find that an individual’s willingness to trust others depends on perceived shared values. For example, graduates of the same university may seem to share similar work standards, which may suggest that they share similar social values and ethical perspectives. In addition to social similarity, reciprocity is argued to be central to developing trust (Creed et al. 1996). Reciprocity is history-based trust that requires iterative process. Under reciprocal-incentives-based trust, cooperation is motivated by the perception of mutual benefits and can be accelerated with the knowledge of shared purpose (Kramer and Tyler 1996).
In exploring trust in professional relationships, Lewicki and Bunker (1996) identify three forms of trust: (1) calculus-based trust, (2) knowledge-based trust and (3) identification-
based trust. Under calculus-based trust, trust is sustained by behavioural consistency, which is motivated by the benefits derived from consistency or costly consequences for being inconsistent. Knowledge-based trust is based on behaviour predictability and develops using prior information to predict the outcome of an interaction. Thus, knowledge-based trust relies on constant communication with others to obtain accuracy in predictions. Identification-based trust is determined through the identification of ‘desires’ and ‘intentions’. In this form of trust, mutual interests or understanding lead to more effective interactions (Sheppard and Tuchinsky 1996).
Corporate citizenship tends to affect all these three forms of trust. Firms face threats from all of their stakeholders, including misunderstood customers, rogue employees, unhappy investors and defective partners, as well as penalties from regulators relating to compliance (Fombrun, Gardberg and Barnett 2000). Legitimacy theory suggests that firms develop incentives to assume their social responsibilities beyond the scope of interest of financial stakeholders to reduce threats to their licence to operate (Tilling 2004). Corporate citizenship can affect calculus-based trust by delivering consistency in employees’ and firms’ values. Since this information can be observed by outsiders, corporate citizenship programs serve as an avenue for firms to share this information. Corporate citizenship community programs provide an opportunity for outsiders to observe these values and make more accurate predictions about a corporation’s working culture and ethics. Many citizenship programs are designed to deliver corporate philanthropy, which tends to reduce the less self-serving image of the corporation and builds goodwill among stakeholders and society.