Investing in Managerial Honesty

Investing in Managerial Honesty

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

Series number :

Serial Number: 
516/2017

Date posted :

July 20 2017

Last revised :

May 31 2018
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Keywords

  • Honesty • 
  • Earnings management • 
  • market segmentation • 
  • investor preferences • 
  • social value orientation • 
  • protected values • 
  • trust

Two laboratory experiments show that investors perceive a CEO to be more committed to honesty when the CEO resisted, at a personal cost, engaging 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 prominent among investors with a proself value orientation. To prosocial investors, their own honesty values and those attributed to the CEO matter directly; returns play a secondary role. Overall, CEO honesty matters to different investors for distinct reasons.

Authors

Real name:
Matthias Sohn
Real name:
Carmen Tanner