R. Lynn Hannan

The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective

This study examines the behavioral impact of an information system, and how that impact varies with the information systems precision, in an internal reporting environment. In order to examine behavioral effects, we do not permit the owner to contract on the systems output. We propose that a managers reporting decisions are affected by his tradeoff of the benefits of appearing honest against the benefits of misrepresentation. An owners information system affects the managers tradeoff by improving the owners ability to make an inference regarding the managers level of honesty. Thus, to the extent that the manager perceives benefits to appearing honest, the presence of an information system can increase managerial honesty. As the information system becomes more precise, however, the manager must forego greater benefits of misrepresentation in order to achieve the same appearance of honesty. For managers under a precise system, this will shift the tradeoff decision toward the benefits of misrepresentation and away from the benefits of appearing honest. Notably, in our experiment the only benefit of appearing honest is an intrinsically-motivated desire for social approval. Our experimental results are consistent with the tradeoff notion. We find that, although the existence of an information system increases managerial honesty, honesty is lower under a precise than a coarse information system. We also compare profit earned by the owners in our experiment, which relies on a behavioral role of an information system, to the maximum profit theoretically possible given a contractual use of the information system. This comparison suggests that, unless the available information system is sufficiently precise, the owner will obtain greater profits by not contracting on its output, even if that output is fully contractible.

Bonus versus Penalty: Does Contract Frame Affect Employee Effort?

We conducted an experiment in which participants acted as employees under either a bonus contract or an economically equivalent penalty contract. We measured participants’ contract preference, their degree of expected disappointment about having to pay the penalty or not receiving the bonus, their perceived fairness of their contract, and their effort level. Consistent with Luft (1994), we find that employees generally preferred the bonus contract to the penalty contract. We extend Luftŕss work by demonstrating that loss aversion caused employees to expend more effort under the penalty contract than under the economically equivalent bonus contract. That is, employees were more averse to having to pay the penalty than they were to not receiving the bonus, and consequently they chose a higher level of effort under the penalty contract to avoid paying the penalty. However, we also find evidence of reciprocity in that employees who considered their contract to be fairer chose a higher level of effort. Because our participants generally considered the bonus contract fairer than the penalty contract, reciprocity predicts higher effort under the bonus contract, a result opposite to our finding. Our overall result that employee effort was greater under the penalty contract is explained by the fact that, while higher perceived fairness did increase effort, this effect was dominated by the more powerful opposing effect of loss aversion. We discuss the implications of these results for explaining why in practice most actual contracts are bonus contracts rather than penalty contracts.

Flattening the Organization: The Effect of Organizational Reporting Structure on Budgeting Effectiveness

The invention concerns a washing composition for washing a surface to deposit thereon substantially water-insoluble particles. The aqueous washing composition of the invention comprises an anionic surfactant, the particulate substance to be deposited and a water-soluble cationic non-cellulosic polymer which enhances the deposition of the particulate substance onto the surface but which cationic polymer does not form in the composition a water-insoluble complex with the anionic surfactant, the cationic charge density of the polymer being from 0.0001 to 0.0017; the concentration of the cationic polymer in the washing composition being from 0.0001% to 0.01% by weight; and the concentration of the surfactant in the washing composition being from 0.01% to 5% by weight.

Turning Up the Volume: An Experimental Investigation of the Role of Mutual Monitoring in Tournaments†

This study investigates experimentally how mutual monitoring affects effort when employees are compensated via rank-order tournaments. Theory and anecdotal evidence suggest that mutual monitoring may either decrease effort by facilitating collusion or increase effort by stimulating competition. In our first experiment, we find that mutual monitoring increases effort, because participants do not attempt to collude but rather behave competitively. This result leads us to expand our theory and develop hypotheses to predict that the effect of mutual monitoring depends on whether employees have the inclination to collude or compete. Specifically, we predict that mutual monitoring decreases effort when employees are inclined to collude and increases effort when employees are inclined to compete. That is, mutual monitoring will not change the basic inclination created by the workplace setting, but will “turn up the volume” on the effect that such inclination has on effort. Consistent with our predictions, our second experiment finds that mutual monitoring leads to lower effort when participants have a collusive inclination and (eventually) higher effort when they have a competitive inclination. Overall, the results from these two studies suggest that allowing employees to observe each others productive effort in tournament incentive settings may have positive or negative consequences for the firm, depending on whether environmental factors predispose employees to collude or compete.

Information Acquisition and Opportunistic Behavior in Managerial Reporting

Prior experimental studies have investigated factors affecting the honesty of managerial reporting in contexts where managers have no discretion in determining what information to acquire before making their reports. In many organizations, however, responsibility for acquiring information is delegated to local managers. Such delegated decision rights give managers discretion regarding what information to supply to the accounting system on which their reports are based. We predict that discretion may promote opportunistic reporting behavior because it allows managers to avoid relevant information and, in turn, report so as to maximize personal wealth without being knowingly untruthful. We investigate this prediction via two experiments. Results of Experiment 1 suggest that whether discretion in information acquisition affects reporting behavior is influenced by an individual’s preference for honesty (i.e., ethical type). We conduct Experiment 2 to investigate whether this is the case. Results show that, although discretion does not affect the reporting behavior of participants with low or high honesty preferences, participants with moderate honesty preferences tend to exploit discretion in order to avoid relevant information and report opportunistically. Our results suggest that the ability to exploit opportunities afforded by discretion in information acquisition is a potential cost when weighing the costs and benefits of assigning decision rights to managers. Our results also highlight the importance of considering a manager’s ethical type when assigning decision rights.

The Effect of Environmental Risk on the Efficiency of Negotiated Transfer Prices

This study investigates whether and how environmental risk affects the efficiency (i.e., overall organizational profit) of negotiated transfer prices. We discuss three fairness-based sharing norms and the implications each would have for efficiency in our setting. We conduct an experiment in which a buying division and selling division negotiate over the transfer of a resource at six levels of environmental risk. Because the expected value of the transfer is positive, the transfer should be made from the risk neutral organization perspective. Results show that environmental risk decreases efficiency. That is, the frequency of agreement decreases as environmental risk increases. Supplemental analysis suggests that the cause of the decrease in agreements is differences in the focal points that buyers and sellers use for determining a fair transfer price. Specifically, buyers focus on the downside potential of the transfer and sellers focus on the expected value of the transfer. As environmental risk increases, the range between these focal points increases, resulting in failed negotiations (i.e., inefficiencies). Implications for practice and theory are discussed.

Discussion of “Communicated Values as Informal Controls: Promoting Quality While Undermining Productivity?”

Kachelmeier, Thornock, and Williamson () investigate experimentally whether an employers value statement can affect the way employees cognitively represent how they should approach a multi-attribute task, and therefore performance. Counter-intuitively, but consistent with their theory, they find that the value statement negatively affects performance for piece-rate incentivized participants. In my discussion, I elaborate on my comments from the 2013 CAR Conference. Specifically, I discuss contexts where a firms value statement may have positive effects on performance, and the importance of conducting research investigating how the decisions made by management accountants affect learning.