Peer Influence on Managerial Honesty: The Role of Transparency and Expectations

Abstract

We investigate peer influence on managerial honesty under varying levels of transparency. In a laboratory experiment, managers report their costs to a superior to request budget. We manipulate whether the managers learn each other’s report and cost (full transparency) or the report but not the cost (partial transparency). The results show, first, that managers are susceptible to peer influence, as they join peers in reporting honestly and dishonestly both under full and partial transparency. Second, however, the effect of peer influence is asymmetric. While managers’ dishonesty increases much when peers’ reports are higher than they have expected, the opposite is not true. Third, partial transparency reinforces this asymmetry in peer influence. Unlike full transparency, it allows managers to substitute self-serving assumptions for missing information and to thus justify their own dishonesty more easily. The contribution of this study is twofold: It provides evidence for the interaction between transparency and peer influence and it highlights the role of (disappointed) expectations in fueling dishonesty. Our findings warn firms that especially partial transparency may spread dishonesty more than honesty. Transparency may also hurt firms that push honesty norms (as in ethics codes) but fail to enforce compliance, thus raising and disappointing managers’ expectations.

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Fig. 1
Fig. 2

Notes

  1. 1.

    Clor-Proell et al. (2015) refer to the unauthorized use of firm resources for the personal benefit of the employee as fraud.

  2. 2.

    When talking about the first and second manager, we refer to the former with female pronouns and to the latter with male pronouns for convenience.

  3. 3.

    To establish a benchmark for our results, we also conduct a no-transparency condition, where managers learn neither each other’s report nor cost. The no-transparency condition involves another three sessions with 90 participants. Comparisons between the no-transparency condition and our experimental conditions did not yield any meaningful insights. We thus exclude the data and related tests for brevity.

  4. 4.

    This design choice rules out that managers observe the same peer over time, which would allow them to make inferences about this peer’s honesty from trend-based slack signals. The quiz includes questions which make sure that participants understand random rematching.

  5. 5.

    As a numerical example, suppose that the first manager creates a slack of 50%. The second manager, who observes his peer’s slack of 50%, might increase his own slack more when his peer’s report is 80 ECU (for a cost of 60 ECU) than when it is 60 ECU (for a cost of 20 ECU).

  6. 6.

    Untabulated tests of Hypotheses 2a and 2b without control variables confirm these results. Under full transparency, the coefficients are 0.12 for Slack (\(z = 2.98\), \(p = 0.003\)) and 0.23 for \(\text {Slack} \times \text {Surprise}\) (\(z = 1.82\), \(p = 0.068\)); under partial transparency, the coefficients are 0.36 for Report (\(z = 5.10\), \(p < 0.001\)) and 2.26 for \(\text {Report} \times \text {Surprise}\) (\(z = 3.80\), \(p < 0.001\)).

  7. 7.

    Specifically, we consider all reports by type-1 managers to calculate the mean and standard deviation to standardize the report. Conversely, we only use the slack percentages of type-1 managers in the full-transparency condition to standardize slack.

  8. 8.

    Specifically, we run mixed-effects regressions for both conditions, where we control for the manager’s cost and the round. In the full-transparency condition, we include, again, the second manager’s report from the previous period in addition to his slack.

  9. 9.

    The owner is referred to as superior in the article.

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Correspondence to Markus Brunner.

Ethics declarations

Informed Consent

Informed consent was obtained from all individual participants included in the study.

Ethical Approval

All procedures performed in this study that involved human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki Declaration and its later amendments or comparable ethical standards.

Appendix: Instructions

Appendix: Instructions

Welcome

In this experiment, you’ll take decisions that affect other participants. You will stay anonymous, though. No one will learn how you have decided. Data will not be linked to you but only to your terminal.

Please observe the experimenter’s instructions. Do not talk and switch off or mute your mobile devices. If you have any questions, raise your hand. The experimenter will come to you and answer your questions quietly.

All information that you need will be displayed on your screen. You will not be deceived. After the experiment, only the decisions that you take based on this information will be analyzed.

Remuneration

You can earn money in this experiment. The currency is ECU instead of Euro. The conversion rate is:

$$14\,{\text {ECU}} = 1\,{\text {Euro}}.$$

You will be remunerated in private and in cash at the end of the experiment. The other participants will not learn how much money you have made.

Overview

The participants have different tasks. One-third of the participants are owners, two-thirds are managers.Footnote 9 One owner and two managers make a firm.

You are randomly assigned as owner or manager. You stay either as an owner or as a manager throughout the experiment.

The experiment consists of 10 rounds. In each round, participants are randomly rematched into firms. You will not learn the identity of the other people in your firm. You will never be in a firm with the same participants in two subsequent rounds, though.

At the end of the experiment, you will take a questionnaire at your terminal. Your answers are supposed to help us interpret your decisions.

Task

In each round, either manager realizes an investment. Either investment can cost a random amount of 20, 21, 22, ..., 100 ECU. All values are equally likely. The costs of both investments are independent of each other.

The profit from the investments is random. Depending on the market situation, the joint profit from both investments can be 160, 161, ..., 240 ECU. All values are equally likely. The profit is independent of the costs of the investments.

Either manager has 200 ECU to fund the cost of his or her investment. The owner refunds the costs from the revenue of the investments. The owner keeps the profit, which varies with the market situation, but is 200 ECU on average.

The owner learns the joint revenue of both investments, but not their actual costs. The managers know the costs of their investments, but not the revenue.

Either manager submits a report on his or her own cost to the owner. Either manager can report his or her cost truthfully or untruthfully overstate his or her cost. The owner refunds the reported costs.

Sequence of Events (Full-Transparency Condition)

Each round proceeds as follows:

  1. 1.

    Either manager learns both his or her own and the other manager’s cost.

  2. 2.

    The first manager submits to the owner a report on his or her cost. The second manager also learns this report.

  3. 3.

    The second manager submits to the owner a report on his or her cost. The first manager also learns this report.

  4. 4.

    The owner learns the joint revenue from both investments and refunds to the managers their reported costs.

Sequence of Events (Partial-Transparency Condition)

Each round proceeds as follows:

  1. 1.

    Either manager learns his or her cost.

  2. 2.

    The first manager submits to the owner a report on his or her cost. The second manager also learns this report.

  3. 3.

    The second manager submits to the owner a report on his or her cost. The first manager also learns this report.

  4. 4.

    The owner learns the joint revenue from both investments and refunds to the managers their reported costs.

Payoffs

The owner’s and managers’ payoffs result from the managers’ reports (all values are in ECU):

  • Owner’s payoff =

    Revenue from both investments

    • First manager’s reported cost

    • Second manager’s reported cost;

  • Manager’s payoff =

    200

    + Manager’s reported cost

    − Manager’s actual cost.

If both managers report their costs truthfully, they receive 200 ECU each. The owner receives then, depending on the market, 161, 162, ..., 240 ECU, that is 200 ECU on average.

The remuneration results from the payoffs from the investments in 1 round of the 10 rounds. This round is randomly drawn.

Estimation Task (Owner)

As an owner, you have the following additional task: You estimate the managers’ reports before learning these reports. No one will learn about your estimate.

Your estimates can earn you money. The payoff from estimating the reports depends on how accurate your estimates are.

The following table shows how the difference between your estimates and the reports translates in payoffs. All values in the table are in ECU.

Difference between estimate and report 0 \(\pm 1\) \(\pm 2\) \(\pm 3\) \(\pm 4\) \(\pm 5\) >±5
Payoff 15 12 9 7 5 3 0

The remuneration results from the payoffs from estimating the reports in 1 round of the 10 rounds. This round is randomly drawn.

Estimation Task (Manager)\(^{10}\)

As a manager, you have the following additional task: You estimate the other manager’s report. No one will learn about your estimate.

Your estimate can earn you money. The payoff from estimating the report depends on how accurate your estimate is.

The following table shows how the difference between your estimates and the reports translates in payoffs. All values in the table are in ECU.

Difference between estimate and report 0 \(\pm 1\) \(\pm 2\) \(\pm 3\) \(\pm 4\) \(\pm 5\) >±5
Payoff 30 24 18 14 10 6 0

The remuneration results from the payoffs from estimating the reports in 1 round of the 10 rounds. This round is randomly drawn.

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Brunner, M., Ostermaier, A. Peer Influence on Managerial Honesty: The Role of Transparency and Expectations. J Bus Ethics 154, 127–145 (2019). https://doi.org/10.1007/s10551-017-3459-9

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Keywords

  • Honesty
  • Motivated reasoning
  • Peer influence
  • Reporting
  • Social norms
  • Transparency