Honesty Is the Best Policy–When There Is Money in It: Can Firms Promote Honest Reporting Behavior by Managers?
AbstractThis 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 InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2007-28.
Date of creation: 2007
Date of revision:
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Web page: http://center.uvt.nl
Managerial honesty; Incentive compensation intensity; Peer behavior; Audit effectiveness;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ACC-2007-09-02 (Accounting & Auditing)
- NEP-ALL-2007-09-02 (All new papers)
- NEP-BEC-2007-09-02 (Business Economics)
- NEP-CFN-2007-09-02 (Corporate Finance)
- NEP-EXP-2007-09-02 (Experimental Economics)
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