Decreasing Operational Distortion and Surrogation through Narrative Reporting

Posted: 28 Feb 2017 Last revised: 3 Nov 2018

See all articles by Jeremiah W. Bentley

Jeremiah W. Bentley

Isenberg School of Management, University of Massachusetts Amherst

Date Written: June 19, 2018

Abstract

Prior research finds that agents who are compensated on an imperfect measure of performance tend to distort their operational decisions and believe that the measure is more reflective of reality than it actually is (i.e. they surrogate). I find that agents distort decisions less and surrogate less when they can provide unverifiable narrative explanations for their actions. In my experiment, experienced chess players place bets on and write explanations about in-progress chess games. I manipulate whether or not participants give their explanations to their boss (who allocates a subjective bonus) when working as an agent. Participants who give explanations are more likely to make bets that reflect all dimensions of a chess position, rather than making bets that favor only the objective measure. They are also less likely to surrogate and are more likely to write about unmeasurable aspects of the games when subsequently making bets on their own behalf.

Keywords: Operational Distortion, Surrogation, Narrative Reporting, Preference for Consistency, Cheap Talk, Real Earnings Management

JEL Classification: M40, M41

Suggested Citation

Bentley, Jeremiah W., Decreasing Operational Distortion and Surrogation through Narrative Reporting (June 19, 2018). Jeremiah W Bentley (2018) Decreasing Operational Distortion and Surrogation Through Narrative Reporting. The Accounting Review In-Press. doi: 10.2308/accr-52277. Available at SSRN: https://ssrn.com/abstract=2924726 or http://dx.doi.org/10.2139/ssrn.2924726

Jeremiah W. Bentley (Contact Author)

Isenberg School of Management, University of Massachusetts Amherst ( email )

Department of Accounting
Amherst, MA 01003
United States

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