DP13207 Investing in managerial honesty
|Author(s):||Rajna Gibson, Matthias Sohn, Carmen Tanner, Alexander F Wagner|
|Publication Date:||September 2018|
|Keyword(s):||Earnings management, honesty, investor preferences, investor segmentation, protected values, social value orientation, Trust|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13207|
Two laboratory experiments show that investors perceive a CEO to be more committed to honesty when the CEO resisted, at a personal cost, engaging 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 prominent among investors with a proself value orientation. To prosocial investors, their own honesty values and those attributed to the CEO matter directly; returns play a secondary role. Overall, CEO honesty matters to different investors for distinct reasons.