Investing in Managerial Honesty

Investing in Managerial Honesty

Alexander Wagner, Rajna Gibson, Matthias Sohn, Carmen Tanner

Series number :

Serial Number: 
516/2017

Date posted :

July 20 2017

Last revised :

August 02 2017
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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. A one standard deviation higher CEO’s perceived commitment to honesty compared to another CEO reduces the relevance, for investment decisions, of differences between the CEOs’ claimed future returns by 40%.

This interaction effect is prominent among investors with a pro-self orientation. To pro-social investors, their own honesty values and those attributed to the CEO matter directly, not through the returns. Overall, CEO honesty matters to different investors for distinct reasons.

Authors

Real name:
Rajna Gibson
Real name:
Matthias Sohn
Real name:
Carmen Tanner