EC 10

Question 1

Honesty of Managerial Reporting – Hannan, Rankin, & Towry (2006)

Answer 1

• When deciding about truthful reporting in the context of budgeting, agents tradeoff their wealth preferences with their preferences for honesty (or, more general, social preferences)
• A fully selfish agent would always report fully untruthful. Empirical data show that there is more variation.
• The tradeoff between wealth preferences and honesty preferences is influenced by the precision of the information system:
• Compared to no information system, a coarse information system makes reporting more truthful
• Compared to a coarse information system, a precise information system makes reporting less truthful
• The results are driven by our preferences to appear honest:
• The principal can use the information system to derive a signal about the agent’s honesty
• Agents have a preference to appear honest and are willing to give up some wealth to appear honest
  (explains the positive effect of a coarse information system)
• But agents are not willing to pay too much in order to satisfy their preference to appear honest (explains
  the negative effect of a precise information system)

Question 2

Honesty of Managerial Reporting – Cardinaels, Dierynck & Zhang (2019)

Answer 2

• When deciding about truthful reporting in the context of budgeting, agents tradeoff their wealth preferences
  with their preferences for honesty (or, more general, social preferences)
• In complex firms, employees develop both a ‘firm identity’ and a ‘business unit identity’. In budgeting, those identities often conflict: creating slack benefits the business unit but harms the firm
• Reducing the social distance between BU employees and the firm (i.c. the CEO) should lead to the development of a compromised identity in which the identification to the firm (vis-à-vis the business unit)
  becomes stronger, leading to more truthful reporting.
• We find that reducing the social distance induces more truthful reporting but only among more prosocial employees.
• These results question the magnitude of the benefits of efforts to reduce the social distance between CEOs and
  employees when it comes to truthful reporting

Question 3

Honesty of Managerial Reporting – Cardinaels & Yin (2015, JAR)

Answer 3

ncentives and monitoring systems usually have an incentive effect

The decision to use incentives also has other effects that can
weaken the incentive effect:
- Trust effect
Choosing for incentives reveals that the superior has low trust in the subordinate. Such low trust is reciprocated by the subordinate.
- Information leakage effect
Choosing for incentives reveals that ‘dishonesty is the social norm’ and people typically comply with the social norm

Incentives will only have an effect if they are not too strict and if the risk on negative trust and information leakage effects is mitigated