Reputation and Managerial Truth-Telling as Self-Insurance

53 Pages Posted: 3 Mar 2003 Last revised: 7 May 2013

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2008

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 may not trade on or sell private information, but receives wages that can depend on the current stock price or forecast accuracy. The manager faces imperfectly hedgeable shocks to non-wage income. When compensation is value-based, this induces a partially revealing equilibrium in which the insider manipulates the stock price to minimize consumption variance. Intuitively, the manager builds reputation when times are good and honesty is affordable, and exploits reputation in times of need. The paper thus formalizes a self-insurance motivation for endogenous reputation for honesty.

Keywords: Reputation, Information, Truth-telling, Self-insurance, Managerial Compensation

JEL Classification: C72, C73, D82, D83, G30

Suggested Citation

Fisher, Adlai J. and Heinkel, Robert L., Reputation and Managerial Truth-Telling as Self-Insurance (June 1, 2008). Journal of Economics and Management Strategy, 17 (2), 489-540. Available at SSRN: https://ssrn.com/abstract=327940 or http://dx.doi.org/10.2139/ssrn.327940

Adlai J. Fisher (Contact Author)

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

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8331 (Phone)
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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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