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Earnings Management and Managerial Honesty: The Investors’ Perspectives

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  • Wagner, Alexander F.
  • Gibson Brandon, Rajna
  • Sohn, Matthias
  • Tanner, Carmen

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.

Suggested Citation

  • Wagner, Alexander F. & Gibson Brandon, Rajna & Sohn, Matthias & Tanner, Carmen, 2018. "Earnings Management and Managerial Honesty: The Investors’ Perspectives," CEPR Discussion Papers 13207, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13207
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    1. Pham, Mia Hang, 2020. "In law we trust: Lawyer CEOs and stock liquidity," Journal of Financial Markets, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Earnings management; Honesty; Investor preferences; Investor segmentation; Protected values; Social value orientation; Trust;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General

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