Working Harder but Lying More? How Managers' Effort Influences Their Reporting
45 Pages Posted: 18 Aug 2015 Last revised: 15 Dec 2015
Date Written: December 1, 2015
Many firms decentralize their operational and accounting functions, such that managers are responsible for both making operational decisions that affect firm performance and reporting the privately observed performance outcomes of those operational decisions to higher-level managers. Importantly, in such settings, the operational decision is “sunk” at the time of the reporting decision. We investigate how managers’ previous operational effort (hereafter, simply “effort”) affects their subsequent reporting decision. We predict that providing greater effort increases a manager’s sense of deservingness and that when managers privately observe an unfavorable performance outcome, those with a greater sense of deservingness are more likely to misreport. We find support for these predictions in an experiment that includes both a between-participant component and a within-participant component. In addition, consistent with our theory, we find evidence that deservingness mediates the effect of effort on misreporting. Collectively, our findings highlight a potential cost of decentralizing operational and accounting functions.
Keywords: Moral hazard, managerial reporting, honesty, deservingness
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