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Investing in Managerial Honesty

Author

Listed:
  • Rajna Gibson

    (University of Geneva and Swiss Finance Institute)

  • Matthias Sohn

    (Zeppelin University)

  • Carmen Tanner

    (University of Zurich)

  • Alexander F. Wagner

    (University of Zurich, Centre for Economic Policy Research (CEPR), European Corporate Governance Institute (ECGI), and Swiss Finance Institute)

Abstract

How does investor perception of managerial honesty affect investment choices? Two laboratory experiments shed light on this question. Investors perceive a CEO to be more committed to honesty when the CEO previously resisted, at a personal cost, engaging in earnings management. A one standard deviation higher CEO’s perceived commitment to honesty compared to another CEO reduces the relevance, for investment decisions, of announced future return differences between the CEOs by about 40%. This effect is prominent among investors with a pro-self orientation. Pro-social investors are insensitive to returns, but seek to invest with a CEO with matching honesty values. Overall, these results suggest that (a) (perceived) honesty of the CEO matters, (b) investors’ personal values affect their investment choices, and (c) investors segment into stocks based on the joint effects of these two forces.

Suggested Citation

  • Rajna Gibson & Matthias Sohn & Carmen Tanner & Alexander F. Wagner, 2017. "Investing in Managerial Honesty," Swiss Finance Institute Research Paper Series 17-03, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1703
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    File URL: https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2912795
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    Cited by:

    1. Chloe Tergiman & Marie Claire Villeval, 2023. "The Way People Lie in Markets: Detectable vs. Deniable Lies," Management Science, INFORMS, vol. 69(6), pages 3340-3357, June.
    2. Chloe Tergiman & Marie Claire Villeval, 2019. "The Way People Lie in Markets," Working Papers 1927, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

    More about this item

    Keywords

    Honesty; earnings management; market segmentation; investor preferences; social value orientation; protected values; trust;
    All these keywords.

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