Reputation and Managerial Truth-Telling as Self-Insurance

52 Pages Posted: 6 May 2008

See all articles by Adlai J. Fisher

Adlai J. Fisher

University of British Columbia (UBC) - Sauder School of Business

Robert L. Heinkel

University of British Columbia (UBC) - Division of Finance

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Abstract

We investigate truth-telling by an informed insider, or manager, who repeatedly forecasts cash flows to competitive investors in a standard message game. The insider cannot trade on or sell private information, but faces imperfectly hedgeable nonwage income shocks. When compensation depends on the current stock price, a partially revealing equilibrium may exist in which the manager manipulates his reports, and hence the stock price, to reduce consumption variance. Intuitively, the manager builds reputation in good times when honesty is affordable, and exploits reputation in times of need. Endogenous reputation for honesty thus follows from a self-insurance motive.

Suggested Citation

Fisher, Adlai J. and Heinkel, Robert L., Reputation and Managerial Truth-Telling as Self-Insurance. Journal of Economics & Management Strategy, Vol. 17, Issue 2, pp. 489-540, Summer 2008. Available at SSRN: https://ssrn.com/abstract=1128387 or http://dx.doi.org/10.1111/j.1530-9134.2008.00185.x

Adlai J. Fisher (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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HOME PAGE: http://finance.sauder.ubc.ca/~fisher

Robert L. Heinkel

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8347 (Phone)
604-822-8521 (Fax)

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