The Effect of Information System Precision on Honesty in Managerial Reporting: An Experimental Examination Incorporating Operating Uncertainty

Abstract

We apply insights from a model of social norm activation to an agency model of capital budgeting to develop a positive behavioral relation between information system precision and honesty in managerial reporting. This relation is based on the ability of a precise information system to reduce information asymmetry between the owner and the manager and thereby promote the activation of an honesty norm. Next, we use this behavioral theory to predict that high operating uncertainty in the information system offsets this positive relation by allowing the manager to hide behind the uncertainty and thereby evade the honesty norm. Using an experimental agency setting in the literature, we find evidence consistent with our behavioral theory. Information system precision increases managerial honesty under low but not under high operating uncertainty and managerial honesty is the highest under a precise information system with low operating uncertainty. An analysis of exit questionnaire responses confirms our underlying behavioral theory based on social norm activation and norm evasion. This study helps explain prior experimental results and emphasizes the importance of considering operating uncertainty in determining the optimal information system.