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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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Author Info
Jia, Y. (Tilburg University, Center for Economic Research)

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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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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

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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

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  1. James Andreoni & Lise Vesterlund, 2001. "Which Is The Fair Sex? Gender Differences In Altruism," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 293-312, February. [Downloadable!] (restricted)
    Other versions:
  2. Benabou, Roland & Tirole, Jean, 2003. "Incentives and Prosocial Behavior," IDEI Working Papers 389, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jan 2006. [Downloadable!]
    Other versions:
  3. Bergstresser, Daniel & Philippon, Thomas, 2006. "CEO incentives and earnings management," Journal of Financial Economics, Elsevier, vol. 80(3), pages 511-529, June. [Downloadable!] (restricted)
  4. Richard B. Freeman & Joni Hersch, 2004. "Introduction," NBER Chapters, in: Emerging Labor Market Institutions for the Twenty-First Century, pages 1-12 National Bureau of Economic Research, Inc. [Downloadable!]
  5. repec:att:wimass:19199810 is not listed on IDEAS
  6. Merle Erickson & Michelle Hanlon & Edward L. Maydew, 2006. "Is There a Link between Executive Equity Incentives and Accounting Fraud?," Journal of Accounting Research, Blackwell Publishing, vol. 44(1), pages 113-143, 03. [Downloadable!] (restricted)
  7. Baiman, Stanley, 1990. "Agency research in managerial accounting: A second look," Accounting, Organizations and Society, Elsevier, vol. 15(4), pages 341-371. [Downloadable!] (restricted)
  8. 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. [Downloadable!]
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