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
JEL(s): G0
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.