DRIVERS OF PUBLIC OPINION ON THE ACCEPTABILITY OF DISTORTING PERFORMANCE MEASURES

Agents often inflate measured performance by distorting operating decisions (e.g., real earnings management) and/or reporting decisions (e.g., accruals management). Across four studies, we find that public judgments of distortion’s acceptability largely reflect assessments of how harmful and norm-violating the distortion is. Judgments of operating distortion primarily reflect assessments of harm, while judgments of reporting distortion primarily reflect assessments of norm violation. These results are consistent with the Theory of Dyadic Morality (Gray, Waytz, and Young 2012; Schein and Gray 2017). We also find that those who perceive an accounting system as more unfairly withholding an agent’s bonus assess distortion (especially reporting distortion) to be less norm-violating. Those who perceive the performance measure as less appropriate for capturing the value of performance to stakeholders assess distortion (especially operating distortion) to be more harmful. Assessments of distortions’ harm and norm violation explain a substantial portion of the variation in acceptability judgments.

Keywords: Earnings Management, Real Activities Management, Ethics, Survey Research, Experimental Research, Operating Distortion, Reporting Distortion, Theory of Dyadic Morality

JEL Classification: M41

Suggested Citation: Suggested Citation

Bentley, Jeremiah W. and Bloomfield, Matthew J. and Bloomfield, Robert J. and Lambert, Tamara A., DRIVERS OF PUBLIC OPINION ON THE ACCEPTABILITY OF DISTORTING PERFORMANCE MEASURES (July 17, 2024). Available at SSRN: https://ssrn.com/abstract=2823705 or http://dx.doi.org/10.2139/ssrn.2823705