Peer Influence on Managerial Honesty: The Moderating Role of Earnings Position

• In Event: Traditional Accounting Issues

Abstract

Using a production budgeting experiment, this study examines the effects of peer influence and firm earnings position on managerial honesty. In the experiment, participants report production costs to request funds from the firm based on their actual, private cost information. Honesty is measured as the difference between the cost reported and the actual cost of production. We manipulate peer influence by showing participants either an honest or dishonest peer cost report. The firm’s earnings position is manipulated at two levels. The first is a gain condition where the firm earns positive profits regardless of the managerial cost reporting decision. The second is a gain/loss condition where the firm’s earnings position (i.e., positive or negative profits) depends on the managerial cost reporting decision. We find that participants overstate costs (i.e., were less honest) to a greater extent in the dishonest peer influence condition than in the honest peer influence condition. In addition, we find that the effectiveness of peer influence on managerial honesty is context dependent. Specifically, participants respond to both dishonest and honest peer influence in the gain condition but they do not respond to peer influence in the gain/loss condition. The contribution of this study is twofold. It provides evidence for the honest peer influence on honesty and it highlights the role of earnings position on the effectiveness of peer influence on honesty. Controlling the disclosure of certain peer information is not possible because individuals can learn about peer information (honest or dishonest) formally or informally. Such uncontrollable peer information may be harmful to firms. Our results show firms that providing managers the consequences of managerial budgeting on the firm operational outcome can neutralize the effect of peer influence on managerial honesty.

Authors

• Chaoping Li, Skidmore College

• Andrea R Drake, Louisiana Tech University