Earnings Management and Managerial Honesty: The Investors’ Perspectives
47 Pages Posted: 7 Feb 2017 Last revised: 21 Feb 2023
Date Written: July 25, 2022
This paper studies how investors infer CEO commitment to honesty from earnings management and how these perceptions – in conjunction with investors’ own social and moral preferences – shape 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 only play a secondary role. Overall, our results suggest that moral motives are not a niche concern for norm-constrained investors, but instead matter to different categories of investors for distinct reasons.
Keywords: Earnings management, honesty, investor preferences, investor segmentation, protected values
JEL Classification: M41, G41, G11
Suggested Citation: Suggested Citation