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Honesty Is the Best Policy–When There Is Money in It: Can Firms Promote Honest Reporting Behavior by Managers?

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  • Jia, Y.

    (Tilburg University, Center for Economic Research)

Abstract

This paper provides experimental evidence on how incentive compensation, peer-group behavior, and audit (team) effectiveness influence managerial reporting behavior. Results show that an increase in incentive compensation intensity induces subjects to report less truthfully. High level of peer honesty promotes truthful reporting; however, the effects are weaker when incentive compensation intensity is high. Audit (team) effectiveness shows no significant influence on reporting behavior. The results provide the first clear evidence that firms need to consider carefully the effect of incentive compensation as well as the influence of peer groups when designing contracts. Furthermore, without a credible penalty for untruthful financial report, increased audit (team) effectiveness will not promote honest reporting.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2007-28.

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Date of creation: 2007
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Handle: RePEc:dgr:kubcen:200728

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Web page: http://center.uvt.nl

Related research

Keywords: Managerial honesty; Incentive compensation intensity; Peer behavior; Audit effectiveness;

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  1. Andreoni,J. & Vesterlund,L., 1998. "Which is the fair sex? : Gender differences in altruism," Working papers 10, Wisconsin Madison - Social Systems.
  2. Benabou, Roland & Tirole, Jean, 2005. "Incentives and Prosocial Behavior," IZA Discussion Papers 1695, Institute for the Study of Labor (IZA).
  3. R. Lynn Hannan & John H. Kagel & Donald V. Moser, 2002. "Partial Gift Exchange in an Experimental Labor Market: Impact of Subject Population Differences, Productivity Differences, and Effort Requests on Behavior," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 923-951, October.
  4. Daniel Bergstresser & Thomas Philippon, 2003. "CEO incentives and earnings management," Proceedings 862, Federal Reserve Bank of Chicago.
  5. Baiman, Stanley, 1990. "Agency research in managerial accounting: A second look," Accounting, Organizations and Society, Elsevier, vol. 15(4), pages 341-371.
  6. Merle Erickson & Michelle Hanlon & Edward L. Maydew, 2006. "Is There a Link between Executive Equity Incentives and Accounting Fraud?," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 113-143, 03.
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