Honesty in Managerial Reporting

46 Pages Posted: 11 May 2001

See all articles by John Evans

John Evans

University of Pittsburgh - Katz Graduate School of Business

R. Lynn Hannan

Tulane University - A.B. Freeman School of Business

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

Donald V. Moser

University of Pittsburgh - Accounting Group

Abstract

This study reports the results of three experiments that examine how preferences for wealth and honesty affect managerial reporting. We find that subjects often sacrifice wealth to make honest or partially honest reports, and they generally do not lie more as the payoff to lying increases. We also find less honesty under a contract that provides a smaller share of the total surplus to the manager than under one that provides a larger share, suggesting that the extent of honesty may depend on how the surplus is divided between the manager and the firm. The optimal agency contract yields more firm profit than a contract that relies exclusively on honest reporting. However, a modified version of the optimal agency contract, which makes use of subjects' preferences for honest reporting, yields the highest firm profit. These results suggest that firms may be able to design more profitable employment contracts than those identified by conventional economic analysis.

Keywords: Experiment, Honesty, Incentive contract, Managerial reporting

JEL Classification: D82, J33, C91, M40, M46

Suggested Citation

Evans, John Harry and Hannan, Rebecca Lynn and Krishnan, Ranjani and Moser, Donald V., Honesty in Managerial Reporting. The Accounting Review, October 2001, Available at SSRN: https://ssrn.com/abstract=269448 or http://dx.doi.org/10.2139/ssrn.269448

John Harry Evans (Contact Author)

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

230 Mervis Hall
Pittsburgh, PA 15260
United States

Rebecca Lynn Hannan

Tulane University - A.B. Freeman School of Business ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-353-4687 (Phone)
517-432-1101 (Fax)

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)

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