Investing in managerial honesty

Corporate fraud and managerial deception have been pervasive and value-destroying in recent decades. This column analyses whether investors form views about a CEO’s honesty based on his or her previous actions, and how this affects investment decisions. A CEO who has resisted, at personal cost, engaging in earnings management is perceived as being more committed to honesty, which appeals to pro­-social investors. Pro-self investors, on the other hand, value honesty when it comes to information regarding investment returns.