Earnings Management and Managerial Honesty: The Investors’ Perspectives

Earnings Management and Managerial Honesty: The Investors’ Perspectives

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

Series number :

Serial Number: 
516/2017

Date posted :

July 20 2017

Last revised :

November 04 2020
SSRN Share

Keywords

  • Earnings management • 
  • Honesty • 
  • investor preferences • 
  • investor segmentation • 
  • protected values

Extant research shows that CEO characteristics and moral preferences affect earnings management. This paper studies how investors infer CEOs’ moral preferences 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.

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Published in

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Authors

Real name:
Matthias Sohn
Real name:
Carmen Tanner