Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244687 
Year of Publication: 
2021
Series/Report no.: 
LawFin Working Paper No. 7
Publisher: 
Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin), Frankfurt a. M.
Abstract: 
Extant research shows that CEO characteristics affect earnings management. This paper studies how investors infer a specific characteristic of CEOs, namely moral commitment to honesty, from earnings management and how this perception - in conjunction with their own social and moral preferences - shapes their investment choices. We conduct two laboratory experiments simulating investment choices. Our results show that participants perceive a CEO to be more committed to honesty when they infer that the CEO engaged less in earnings management. For investment decisions, a one standard deviation increase in a CEO's perceived commitment to honesty compared to another CEO reduces the relevance of differences in the CEOs' claimed future returns by 40%. This effect is most prominent among investors with a proself value orientation. To prosocial investors, their own honesty values and those attributed to the CEO matter directly, while returns play a secondary role. Overall, perceived CEO honesty matters to different investors for distinct reasons.
Subjects: 
Earnings management
honesty
investor preferences
investor segmentation
protected values
JEL: 
M41
G41
G11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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