Reputation and Managerial Truth-Telling as Self-Insurance
53 Pages Posted: 3 Mar 2003 Last revised: 7 May 2013
Date Written: June 1, 2008
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: Suggested Citation