Managing Earnings to Appear Truthful: The Effect of Public Scrutiny on Exactly Meeting a Threshold

Abstract

The past two decades have not eliminated managers’ willingness to manage earnings to meet and beat thresholds but have increased investors’ skepticism of earnings that exactly meet those thresholds. This provides perverse incentives to not meet earnings expectations exactly. Using a low context experiment, we find that managers who are more sensitive to others’ scrutiny, misreport to avoid exactly meeting a benchmark when public scrutiny increases, even though they have no financial incentive to do so. Thus, we uncover a new incentive to manage earnings: misreporting to appear truthful. Further, we show that this scrutiny increases managers’ belief that the market will accept their reports, consistent with managers misreporting for self-presentational goals. These results are important as managers are increasingly scrutinized via more intimate forms of disclosure and communication, such as social media.

Keywords: Experimental Economics, Earnings Management, Benchmarks, Financial Reporting, Public Scrutiny, Dark Triad

JEL Classification: C91, C92, G1, M41, M43