Earnings Management and Managerial Honesty: The Investors’ Perspectives

Alexander Wagner, Rajna Gibson Brandon, Matthias Sohn and Carmen Tanner

No 13207, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Extant research shows that CEO characteristics affect earnings management. This paper studies how investors infer a specific characteristic of CEOs, namely moral commitment to honesty, from earnings management and how this perception – in conjunction with their own social and moral preferences – shapes their investment choices. We conduct two laboratory experiments simulating investment choices. Our results show that participants perceive a CEO to be more committed to honesty when they infer that the CEO engaged less in earnings management. For investment decisions, a one standard deviation increase in a CEO's perceived commitment to honesty compared to another CEO reduces the relevance of differences in the CEOs’ claimed future returns by 40%. This effect is most prominent among investors with a proself value orientation. To prosocial investors, their own honesty values and those attributed to the CEO matter directly, while returns play a secondary role. Overall, perceived CEO honesty matters to different investors for distinct reasons.

Keywords: Earnings management; Honesty; Investor preferences; Investor segmentation; Protected values; Social value orientation; Trust (search for similar items in EconPapers)
JEL-codes: G0 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-cfn, nep-exp and nep-hpe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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