CeDEx Seminar - Alexander Wagner (University of Zurich)

Rajna Gibson, Matthias Sohn, Carmen Tanner and Alexander F. Wagner

How does investor perception of managerial honesty affect investment choices? Two laboratory experiments shed light on this question. Investors perceive a CEO to be more committed to honesty when the CEO previously resisted, at a personal cost, engaging in earnings management. A one standard deviation higher CEO’s perceived commitment to honesty compared to another CEO reduces the relevance, for investment decisions, of announced future return differences between the CEOs by about 40%. This effect is prominent among investors with a pro-self orientation. Pro-social investors are insensitive to returns, but seek to invest with a CEO with matching honesty values. Overall, these results suggest that (a) (perceived) honesty of the CEO matters, (b) investors’ personal values affect their investment choices, and (c) investors segment into stocks based on the joint effects of these two forces.