How leaders influence (un)ethical behaviors within organizations: A laboratory experiment on reporting choices

Abstract

We use a lab experiment to examine whether and how leaders influence workers’ (un)ethical behavior through financial reporting choices. We randomly assign the role of leaders or workers to subjects, who can choose to report an outcome via automatic or self-reporting. Self-reporting allows for profitable and undetectable earnings manipulation. We vary the leaders’ ability to choose the reporting method, and to punish workers. We show that workers are more likely to choose automatic reporting when their leader voluntarily does so, and can assign punishment. Even workers who choose self-reporting tend to cheat less when their leader chooses automatic reporting. Nonetheless, most leaders do not opt for automatic reporting in the first place: they often choose self-reporting, and punish workers who rather choose automatic reporting. Collectively, our results reveal a dual effect of leadership on ethical behaviors in organizations: workers behave more ethically if their leader makes ethical choices, but often leaders do not make ethical choices in the first place. Hence, leading by example can backfire.

Keywords: financial reporting; ethical leadership; leaders; fraudulent behavior; cheating

JEL Classification: M14, M41, D20, C92