Positive and Negative Effects of Disaggregated Reporting: An Experimental Examination of Managerial Opportunism and Capital Investment

• In Event: Experimental Research

Abstract

In this study we examine the effects of disaggregated performance reporting on managerial opportunism and capital investment. We develop a modified investment game in which the owner decides whether or not to invest in a firm where production cost is affected by an exogenous shock observed only by the manager. After observing the exogenous shock, the manager provides a report to the owner showing firm production, production costs, and the amount returned to the owner. We manipulate whether production costs are aggregated or disaggregated in the report and whether the manager has discretion over the classification of disaggregated cost items. We find that when reporting discretion is absent, a disaggregated report decreases managerial expropriation relative to an aggregated report. In the presence of reporting discretion, however, managers engage in classification shifting and classify their expropriations as if they were caused by exogenous shocks, thereby providing owners with performance reports that have the appearance of fairness. Thus, we find that the presence of managerial reporting discretion significantly increases managerial expropriation for a disaggregated report. Further, we find that the average percentage of managerial expropriation is not different between the disaggregated report with discretion and the aggregated report. In the case of the disaggregated report with discretion, however, owner investment erodes more slowly because cost reports have the appearance of fairness. These results have potential implications for financial reporting standards and the design of management control systems.

Authors

• Heba Yousef M. Abdel-Rahim, Georgia State University

• Jeffrey Hales, Georgia Institute of Technology

• Douglas E Stevens, georgia state university