Information system precision and honesty in managerial reporting: A re-examination of information asymmetry effects

Hannan, Rankin, and Towry (2006, HRT hereafter) propose that an information system is capable of affecting honesty in the manager's budget report by reducing information asymmetry between the manager and the owner regarding the level of honesty in the budget. They find that going from no information system to a coarse information system increases honesty in managerial reporting. However, they also report evidence that going from a coarse information system to a precise information system decreases honesty in managerial reporting. We extend HRT's study in two ways. First, we extend their behavioral theory by incorporating the possibility that reducing information asymmetry could increase the manager's preference for honesty in the budget (Koford & Penno, 1992; Bicchieri, 2006). Second, we note that HRT held information system accuracy constant at a relatively low level, which is another source of information asymmetry. Thus, we test the robustness of HRTs negative precision result by manipulating information system precision and accuracy at two levels using a computerized version of their manual experiment. We find that information system precision increases honesty in managerial reporting and that this positive precision effect is weaker under low information system accuracy. A supplemental analysis suggests that our data are generally similar to HRTs data in our two low accuracy conditions and that their negative precision result is attributable to an unusual period effect in their coarse information system condition.