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 experimental study finds evidence for a more refined explanation of managers’ willingness to obtain costly additional information. Specifically, our results show that managers are significantly less willing to undertake costly information searches when offered a separate opt-out option for the costly information acquisition process. Our findings are consistent with insights from behavioral economics and social psychology, suggesting that even self-interested people exhibit prosocial behavior because the situation in which they find themselves triggers concerns about appearing selfish to themselves and others. We discuss how creating working conditions that increase managers’ concerns about their self-image may prompt them to make 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