Managing Impressions: The Effect of Non-Contractible Information on Honesty in Managerial Reporting

Managing Impressions: The Effect of Non-Contractible Information on Honesty in Managerial Reporting
Author(s): Towry, Kristy L. and Hannan, R. Lynn and Rankin, Frederick W.
Year: 2004
Paper Number: GBS-ACC-2004-004
Goizueta Department: Accounting

Abstract

This study examines the effect of reductions in information asymmetry on managerial honesty when the information is non-contractible. Intuition suggests that social factors, such as the desire to appear honest, may motivate managers to report more honestly as information asymmetry is reduced. However, prior attempts to confirm this intuition have yielded inconsistent results. We reexamine this issue using an experimental design that allows for a more powerful test and captures a rich dataset, which we use to explore the processes underlying the effects of information asymmetry on honesty. We replicate the inconsistencies of prior studies: although some reduction in information asymmetry results in greater managerial honesty, further reduction does not. Additional analysis provides a plausible explanation for the inconsistent results and potentially reconciles the mixed results of prior studies. We find evidence that managers trade off their preferences for wealth and appearing honest. Reductions in information asymmetry constrain the amount of wealth the manager can claim while still appearing honest, and when this constraint becomes too limiting, managers are willing to forego the appearance of honesty in order to satisfy their preference for wealth. Thus, reductions in information asymmetry will not always lead to increased honesty, and they have the potential even to decrease managerial honesty.