Does the Market Value Managerial Honesty?

When: 09 Sep 2019, 14:15-15:30
Where: HoF 1.28/Shanghai
Speaker: Alexander Wagner

Managerial honesty is a key pillar of the economic system overall.  However, from the Enron scandal to the subprime crisis to the Bernie Madoff scam, fraud and managerial misconduct have rattled investors’ trust over recent decades. Prominent attempts to prevent misconduct have included calls to change the structure of managerial compensation, to strengthen board and auditor independence, and in general to increase regulation -- but these attempts have often met with mixed success. This talk presents findings from some recent research projects that ask whether there is a positive role for markets in supporting managerial honesty.  Specifically, results from an empirical study show that managers who resist engaging in legal earnings management (despite incentives to do so) find higher credibility with the market in the future.  In two laboratory experiments, the idea of a "dishonesty discount" also emerges. Moreover, an analysis of investor preferences suggests that CEO honesty matters to different investors for distinct reasons.