The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective

42 Pages Posted: 24 Sep 2003

See all articles by R. Lynn Hannan

R. Lynn Hannan

Tulane University - A.B. Freeman School of Business

Frederick W. Rankin

Colorado State University, Fort Collins - College of Business

Kristy L. Towry

Emory University

Date Written: April 2006

Abstract

This study examines the behavioral impact of an information system, and how that impact varies with the information system's precision, in an internal reporting environment. In order to examine behavioral effects, we do not permit the owner to contract on the system's output. We propose that a manager's reporting decisions are affected by his tradeoff of the benefits of appearing honest against the benefits of misrepresentation. An owner's information system affects the manager's tradeoff by improving the owner's ability to make an inference regarding the manager's level of honesty. Thus, to the extent that the manager perceives benefits to appearing honest, the presence of an information system can increase managerial honesty. As the information system becomes more precise, however, the manager must forego greater benefits of misrepresentation in order to achieve the same appearance of honesty. For managers under a precise system, this will shift the tradeoff decision toward the benefits of misrepresentation and away from the benefits of appearing honest. Notably, in our experiment the only benefit of appearing honest is an intrinsically-motivated desire for social approval. Our experimental results are consistent with the tradeoff notion. We find that, although the existence of an information system increases managerial honesty, honesty is lower under a precise than a coarse information system. We also compare profit earned by the owners in our experiment, which relies on a behavioral role of an information system, to the maximum profit theoretically possible given a contractual use of the information system. This comparison suggests that, unless the available information system is sufficiently precise, the owner will obtain greater profits by not contracting on its output, even if that output is fully contractible.

JEL Classification: M40, M46

Suggested Citation

Hannan, Rebecca Lynn and Rankin, Frederick W. and Towry, Kristy L., The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective (April 2006). Available at SSRN: https://ssrn.com/abstract=420541 or http://dx.doi.org/10.2139/ssrn.420541

Rebecca Lynn Hannan (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Frederick W. Rankin

Colorado State University, Fort Collins - College of Business ( email )

Fort Collins, CO 80523
United States

Kristy L. Towry

Emory University ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-4895 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
636
Abstract Views
3,380
rank
45,578
PlumX Metrics