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 accounting research suggests managers are willing to undertake these costly information searches because they have social preferences (i.e., distributional fairness and reciprocity). However, our experimental results show that managers are significantly less willing to undertake costly information searches when the situation makes that choice appear more acceptable. Our findings are consistent with predictions rooted in behavioral economics and social psychology that even self-interested people exhibit prosocial behavior because the situation they find themselves in 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