The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective
42 Pages Posted: 24 Sep 2003
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Incentives and Prosocial Behavior
By Roland Bénabou and Jean Tirole
-
Incentives and Prosocial Behavior
By Roland Bénabou and Jean Tirole
-
Incentives and Prosocial Behavior
By Roland Bénabou and Jean Tirole
-
Do Incentive Contracts Crowd Out Voluntary Cooperation?
By Ernst Fehr and Simon Gächter
-
Do Incentive Contracts Crowd Out Voluntary Cooperation?
By Ernst Fehr and Simon Gächter
-
Psychological Foundations of Incentives
By Ernst Fehr and Armin Falk
-
Psychological Foundations of Incentives
By Armin Falk and Ernst Fehr
-
Do Incentive Contracts Undermine Voluntary Cooperation?
By Ernst Fehr and Simon Gächter
-
The Hidden Costs and Returns of Incentives - Trust and Trustworthiness Among CEOS
By Ernst Fehr and John A. List
-
Honesty in Managerial Reporting
By John Evans, R. Lynn Hannan, ...