Honor Among Thieves: Open Internal Reporting and Managerial Collusion

50 Pages Posted: 18 Aug 2011 Last revised: 7 Apr 2015

See all articles by John Evans

John Evans

University of Pittsburgh - Katz Graduate School of Business

Donald V. Moser

University of Pittsburgh - Accounting Group

Andrew H. Newman

University of South Carolina

Bryan Stikeleather

University of South Carolina - Darla Moore School of Business

Date Written: March 23, 2015

Abstract

Firms have increasingly adopted open work environments. Although openness is thought to have benefits, it could also expose firms to an unanticipated cost. An open (closed) internal reporting environment makes it more (less) likely that managers will observe a colleague’s communications with senior executives. This increase in what one manager knows about another manager’s communication to senior executives could facilitate employee collusion to extract resources from the firm. To test whether internal reporting openness results in more collusion, we conduct an experiment in which two managers each make separate reports to the firm about cost information they know in common but that is unknown by the firm. Because both managers face the same truth-inducing contract, conventional economic theory predicts that they will not collude to misreport costs regardless of reporting openness. However, using behavioral theory involving trust and reciprocity, we predict and find that managers honor their non-binding collusive agreements and successfully collude more often in an open versus closed internal reporting environment, leading to lower firm welfare in the open environment. These results suggest that firms should consider how the cost of collusion compares to the benefits of openness.

Keywords: reporting openness, collusion, trust, reciprocity

Suggested Citation

Evans, John Harry and Moser, Donald V. and Newman, Andrew H. and Stikeleather, Bryan, Honor Among Thieves: Open Internal Reporting and Managerial Collusion (March 23, 2015). Available at SSRN: https://ssrn.com/abstract=1909948 or http://dx.doi.org/10.2139/ssrn.1909948

John Harry Evans

University of Pittsburgh - Katz Graduate School of Business ( email )

230 Mervis Hall
Pittsburgh, PA 15260
United States

Donald V. Moser

University of Pittsburgh - Accounting Group ( email )

264 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1726 (Phone)
412-648-1693 (Fax)

Andrew H. Newman (Contact Author)

University of South Carolina ( email )

Columbia, SC
United States

Bryan Stikeleather

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene St
Columbia, SC 29208
United States
8037776034 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
289
Abstract Views
2,123
rank
103,657
PlumX Metrics