Honesty in managerial reporting: How competition affects the benefits and costs of lying

• This experimental study analyzes the effects of competition on honesty in managerial reporting.
• One mode of competition increases the economic pressure to lie; the other induces rivalry amongst participants.
• Additionally, the study analyzes consequences of a gender gap in competitiveness.
• Under economic competition, only male participants increase the level of misrepresentations.
• Under rivalry, all participants increase the level of misrepresentations.

Although research on honesty in managerial reporting has provided important evidence for the idea that competition can restrict the relevance of honesty preferences, why exactly competition has this effect remains largely unexplored. This paper suggests that different aspects of competition independently affect honesty in managerial reporting: economic competition affects the economic benefits of lying, while rivalry diminishes the moral costs of lying. Based on recent findings from social psychology and experimental economics on a gender gap in competitiveness, the study further hypothesizes that the effects of competition on honesty differ across gender. A laboratory experiment was conducted, in which participants had to report cost information in a participative budgeting context under different competitive and non-competitive conditions. Results indicate that an individual's willingness to report honestly decreases significantly when rivalry is introduced, even if the economic benefits of lying remain constant. In contrast, economic competition only diminished the salience of honesty preferences of male participants in the experiment. In conclusion, corporate managers who wish to take advantage of the positive effects of competition, such as increased motivation and efficiency in capital allocation processes, should not only focus on its economic effects but also be aware of its potential negative impact.