Earnings Management and Managerial Honesty: The Investors' Perspectives

Arbeitspapier

Extant research shows that CEO characteristics affect earnings management. This paper studies how investors infer a specific characteristic of CEOs, namely moral commitment to honesty, from earnings management and how this perception - in conjunction with their own social and moral preferences - shapes their investment choices. We conduct two laboratory experiments simulating investment choices. Our results show that participants perceive a CEO to be more committed to honesty when they infer that the CEO engaged less in earnings management. For investment decisions, a one standard deviation increase in a CEO's perceived commitment to honesty compared to another CEO reduces the relevance of differences in the CEOs' claimed future returns by 40%. This effect is most prominent among investors with a proself value orientation. To prosocial investors, their own honesty values and those attributed to the CEO matter directly, while returns play a secondary role. Overall, perceived CEO honesty matters to different investors for distinct reasons.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: LawFin Working Paper ; No. 7

Classification and Topics

• Classification: Wirtschaft ; Accounting ; Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets‡ ; Portfolio Choice; Investment Decisions
• Subject: Earnings management ; honesty ; investor preferences ; investor segmentation ; protected values

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gibson, Rajna ; Sohn, Matthias ; Tanner, Carmen ; Wagner, Alexander F.
• Event: Veröffentlichung
• (who): Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)
• (where): Frankfurt a. M.
• (when): 2021

Further information

• DOI: doi:10.2139/ssrn.2912795
• Handle: http://hdl.handle.net/10419/244687
• URN: urn:nbn:de:hebis:30:3-616471
• Last update: 10.03.2025, 11:45 AM CET