Honesty in Managerial Reporting: Is It Affected by Perceptions of Horizontal Equity?

Abstract

ABSTRACT: This study examines whether changes in salary and the horizontal equity of salary influence the degree of honesty in managerial reporting. The study makes a unique contribution by examining whether changes in honesty are different when they are in response to changes in an individual’s own salary than when they are in response to changes in the salary of his peers. The results showed that when horizontal equity was increased by increasing participant salary (with peer salary held constant), the change in honesty was significantly different than when horizontal equity was increased by decreasing peer salary (with participant salary held constant). However, when horizontal equity was decreased, the effect on honesty was about the same, whether the decrease was accomplished by decreasing participant salary or increasing peer salary. The study also showed that after controlling for effects associated with experience with the task and participants’ own salary changes, perceived changes in the horizontal equity of participants’ salaries (measured by responses on a post-experiment questionnaire) were positively associated with changes in the degree of honesty in managerial reporting. In short, the results suggest that individuals make trade-offs among preferences for wealth, honesty, and horizontal equity, and that firms seeking to exploit honesty preferences should attempt to avoid the introduction of inequity.