In Search of Informed Discretion (Revisited): Are Managers Concerned about Appearing Selfish?

Abstract

To improve the quality of performance evaluation and compensation decisions, managers can undertake costly searches for additional information. Prior management accounting research has found that managers are willing to undertake these costly information searches and has explained this finding through managers’ social preferences (i.e., distributional fairness and reciprocity). Our study first replicates and next extends prior experimental research. Specifically, our findings support that managers’ concerns about appearing selfish, which are determined by the situation managers are in, drive managers’ willingness to obtain additional costly information. Our findings align with insights from behavioral economics and social psychology, indicating that even self-interested individuals may exhibit prosocial behavior when the situation they are in raises concerns about appearing selfish. We discuss how creating working conditions that increase managers’ concerns about appearing selfish may encourage them to make more informed performance evaluation and compensation decisions.

Keywords: managerial discretion; discretionary bonus pool; incentive contracting; reciprocity; fairness; trust; third-party intervention

JEL Classification: C92, D91, M40, M41