Discussion paper

DP13207 Earnings Management and Managerial Honesty: The Investors’ Perspectives

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.


Gibson Brandon, R, M Sohn, C Tanner and A Wagner (eds) (2018), “DP13207 Earnings Management and Managerial Honesty: The Investors’ Perspectives”, CEPR Press Discussion Paper No. 13207. https://cepr.org/publications/dp13207