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Hubris and Unethical Decision Making: The Tragedy of the Uncommon

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Abstract

The research theorizes how hubris impacts ethical decision making and develops empirical evidence that earnings manipulation is more likely at firms led by CEOs influenced by hubris. The theory posits that hubris impairs moral awareness by causing decision makers to ignore external factors that otherwise drive such awareness. Additionally, these individuals apply a flawed subjective assessment of the decision they face which further impairs moral awareness. The predicted result is that hubris leads managers to invoke an amoral decision process which causes a higher incidence of unethical behavior among these individuals. An empirical study investigates the relationship between CEO hubris and the unethical practice of earnings manipulation. This study finds a significant correlation between CEO hubris and earnings manipulation at the firms they lead, an outcome broadly consistent with the theory developed.

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Notes

  1. Tenbrunsel and Messick (2004) theorize that self-interest triggers self-deception and enables ethical fading. Under the approach set forth here, hubris rather than pure self-interest triggers the fading process.

  2. Clearly an argument exists that any type of earnings management activity is misleading and therefore inappropriate. However, some researchers maintain that earnings management actually improves the quality of publicly available information about a firm over the long term given the asymmetric information managers possess (Tucker and Zarowin 2006). While both these perspectives present interesting and cogent arguments, this paper will avoid this broader debate about the overall appropriateness of earnings management and focus instead on instances of manipulation. That said, hubris is envisioned to impact managerial decision making in ways that can cause individuals that subjectively believe that they are managing earnings to adopt a course of action that objectively constitutes manipulation.

  3. This insight was highlighted within the comments of two of the anonymous reviewers of this manuscript.

  4. At the suggestion of one of the reviewers, the potential moderating effects of insider sales on the hubris factors were also examined. This required independent testing of distinct interaction terms of the insider sales and each hubris factor within independent specifications, using Stata’s “inteff” command (Norton et al. 2004). No statistically significant moderating effects were found in any of these specifications.

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  1. Leon Hess Business School, Monmouth University, 400 Cedar Ave., West Long Branch, NJ, 07764, USA

    Joseph McManus

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McManus, J. Hubris and Unethical Decision Making: The Tragedy of the Uncommon. J Bus Ethics 149, 169–185 (2018). https://doi.org/10.1007/s10551-016-3087-9

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