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J. Account.
Public Policy xxx (xxxx) xxx
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J. Account. Public Policy

journal homepage: www.elsevier.com/locate/jaccpubpol
Full length article
The joint impact of accountability and transparency on

managers’ reporting choices and owners’ reaction to those
choices q
Lucy F. Ackert a, Bryan K. Church b, Shankar Venkataraman c,⇑, Ping Zhang d
a
Michael J. Coles College of Business, Kennesaw State University, Kennesaw, GA 30144, United States
b
Scheller College of Business, Georgia Tech, Atlanta, GA 30308-0520, United States
c
Bentley University, Waltham, MA 02452, United States
d
Rotman School of Management, University of Toronto, Toronto, ON M5S 3E6, Canada
a r t i c l e i n f o a b s t r a c t
Article history: We report the results of an experiment designed to investigate the fundamental conflict of
Available online xxxx interest between managers and owners in a financial reporting setting. In our setting, own-
ers seek accurate reports of financial performance whereas managers have incentives to
distort performance reports in a self-serving fashion. Regulatory responses to such conflicts
often call for improved disclosure, including more accountability and transparency (e.g.,
Sarbanes-Oxley Act and Dodd-Frank Act). We use the term accountability to imply answer-
ability—wherein managers are required to reconcile the difference between reported and
actual performance. We predict and find that when managers’ incentives are transparently
disclosed, accountability does not rein in managers’ opportunistic reporting. By compar-
ison, when managers’ incentives are less transparently disclosed (opaque), accountability
dampens managers’ propensity to misreport. However, this reduction in opportunistic
reporting due to accountability comes about because managers offset higher reporting bias
in compensation periods with lower reporting bias in other periods. Therefore, not only are
the benefits of accountability restricted to the setting where managers’ incentives are opa-
que, but the reduced reporting bias might arise due to window-dressing. Although man-
agers seem to care enough about accountability to engage in window-dressing, financial
incentives seem to dominate accountability, at least in our setting. We also find that man-
agers’ payoffs are higher when their incentives are opaque, but owners’ payoffs are invari-
ant regardless of whether incentives are transparent or opaque. Our analyses suggest that
owners may be relying on accountability to curb opportunistic reporting by managers—a
reliance that may be misplaced. Our findings have implications for regulatory responses
aimed at addressing conflicts of interest.
Ó 2019 Elsevier Inc. All rights reserved.
q
The authors thank Bill Dilla, Karim Jamal, Steve Liedtka, Sue Ravenscroft, Tim Shields, and workshop participants at the University of Alberta, Iowa State
University, Lehigh University, Texas Tech University, and participants at the 2018 Journal of Accounting and Public Policy conference at the London School
of Economics for helpful comments. The authors are grateful to Martin Loeb and Larry Gordon (the editors) for their comments and to an anonymous
reviewer for several constructive comments. The authors gratefully acknowledge the financial support of the Social Sciences and Humanities Research
Council of Canada (SSHRC) and the Federal Reserve Bank of Atlanta.
⇑ Corresponding author.
E-mail addresses: lackert@kennesaw.edu (L.F. Ackert), svenkataraman@bentley.edu (S. Venkataraman), pzhang@rotman.utoronto.ca (P. Zhang).
https://doi.org/10.1016/j.jaccpubpol.2019.02.005
0278-4254/Ó 2019 Elsevier Inc. All rights reserved.
Please cite this article as: L. F. Ackert, B. K. Church, et al., The joint impact of accountability and transparency on managers’ reporting
choices and owners’ reaction to those choices, J. Account. Public Policy, https://doi.org/10.1016/j.jaccpubpol.2019.02.005
2 L.F. Ackert et al. / J. Account. Public Policy xxx (xxxx) xxx
1. Introduction
Conflicts of interest are ubiquitous in organizations. A substantial body of research addresses the fundamental problem
that arises when an agent’s incentives are at odds with those of the principal (Jensen and Meckling, 1976; Eisenhardt, 1989).
Regulatory responses to such conflicts often call for improved disclosure (Sarbanes-Oxley Act, 2002), including more
accountability and transparency from firms (Dodd-Frank Act, 2010). Indeed, the preamble to the Dodd-Frank Act states that
the objective of the Act is ‘‘to promote the financial stability of the United States by improving accountability and trans-
parency in the financial system . . . to protect consumers.” We study the joint impact of accountability and transparency
in a stylized experimental setting on (a) managers’ reporting behavior and (b) owners’ processing of managers’ reports.
We first define the terms accountability and transparency as used in this study before outlining our predictions.
We use the term accountability to imply answerability—wherein the manager is required to provide an explanation for his
or her actions. Prior research in accounting argues that requiring managers to reconcile the difference between their actual
and predicted performance makes them accountable, potentially providing a disciplining mechanism to curb opportunistic
behavior (Lundholm, 1999, 2003; Bentley et al., 2015; Bentley, 2018). Consistent with this view of accountability, extant
research indicates that managers often provide narrative disclosures to explain deviations from expected performance
(Bettman and Weitz, 1983; Staw et al., 1983; Baginski et al., 2004; Kimbrough and Wang, 2014). Investors, in turn, attend
to these explanations and incorporate them when evaluating firms’ future prospects (e.g., Clarkson et al., 1999; Barton
and Mercer, 2005; Kimbrough and Wang, 2014). Overall, the sense of accountability that arises from the need to explain
one’s performance is seen as an effective antidote to conflicts of interest.
Although transparency in financial reporting is inherently difficult to define or measure and has multiple facets (Barth
and Schipper, 2008; Lang et al., 2012), in this study we are concerned with a specific type of transparency-the transparency
with which managers’ incentives are disclosed. We define managers’ incentives as transparently disclosed when those incen-
tives are readily understandable to those using the disclosure (Barth and Schipper, 2008; Bloomfield, 2002).1 If managers’
incentives are not readily understandable, we consider the disclosure opaque. Stated differently, transparently-disclosed incen-
tives are less costly to process (for owners) compared to opaquely-disclosed incentives. For example, 10b5-1 plans allow cor-
porate insiders to commit to a trading plan wherein they pre-commit to sell or buy securities of their company on a specified
timetable to pre-empt claims of insider trading. Some companies choose to make the details of these plans public, others do not
(Jagolinzer, 2009). According to our definition of transparency, companies that publicly announce the details of their 10b5-1
plans would be considered transparent whereas those that do not would be considered opaque. Put simply, when managers’
incentives are visible, predictable, and understandable, we view them as transparent. Otherwise, we view them as opaque.
We have two main predictions about the impact of accountability and transparency on managers’ behavior and on own-
ers’ and managers’ payoffs. Our first prediction relates to the joint impact of accountability and transparency on managers’
reporting behavior. We posit that the influence of accountability on managers’ reporting bias depends on the transparency
with which managers’ incentives are disclosed. When managers’ incentives are transparently disclosed, we expect that man-
agers feel morally licensed to exploit their information advantage to the fullest—thus, accountability is unlikely to constrain
managers’ reporting bias (Cain et al., 2005, 2011; Loewenstein et al., 2011). However, when managers’ incentives are opaque,
accountability could act as a constraining force that tempers managers’ reporting bias because social norms prevent man-
agers from fully exploiting their information advantage, particularly when owners are uninformed (Sharma, 1997;
Bicchieri, 2010; Bicchieri and Santuso, 2015; Creed et al., 2014). However, we believe that any reduction in bias will be cos-
metic in that managers will use the flexibility available in the financial reporting system to reduce bias in reporting, but not
at the expense of their payoffs as we describe next.
Our second prediction relates to the impact of accountability and transparency on managers’ and owners’ payoffs. Trans-
parent disclosure of managers’ incentives leads to more opportunistic but consistent reporting behavior by managers
whereas opaque disclosure of managers’ incentives leads to less opportunistic, but inconsistent reporting bias. When man-
agers’ incentives are transparently disclosed, we expect managers’ reports to be consistently positively biased (i.e. managers
will over-report their performance expectations in all periods) because accountability does not discipline managers’ bias.2
However, when managers’ incentives are opaque, they may try to compensate for periods of over-reporting (positively biased
reports) with periods of under-reporting (negatively biased reports) in order to reduce their overall accountability. Consistent
reporting, albeit biased, makes it easier for owners to adjust for managers’ bias because the bias is predictable. Inconsistent
reporting, however, makes it difficult for owners to adjust for managers’ reporting bias because the managers’ reporting bias
is no longer predictable. Consequently, we expect that owners’ payoffs will be higher (lower) when managers’ incentives are
transparent (opaque), regardless of accountability. By contrast, we expect managers’ payoffs will be higher (lower) when their
incentives are opaque (transparent).
1
Barth and Schipper (2008) define financial reporting transparency as the extent to which financial reports reveal an entity’s underlying economics in a way
that is readily understandable by those using the financial reports (emphasis ours). In our setting, transparent (opaque) incentives provide (do not provide) a
clear basis for owners to predict managers’ behavior.
2
In our setting, over-reporting connotes positive bias. We recognize that over-reporting may not always be in managers’ self-interest. For example, Aboody
and Kasznik (2000) show that CEOs time bad news disclosures around stock option awards to lower stock prices so that their (option) exercise price can be
lower. In that case, managers have incentives to under-report. Our inferences do not depend on the direction of the bias.
L.F. Ackert et al. / J. Account. Public Policy xxx (xxxx) xxx 3
We test our predictions in an experimental setting that includes a manager and a cohort of owners. Each experimental
session proceeds for five rounds, comprised of four periods per round. The rounds are analogous to years, and the periods
are analogous to quarters. The manager is endowed with private information about performance and, then, publicly issues
a report. Owners observe the manager’s reported performance and, then, independently come up with their own estimate of
performance. We employ a 2 2 experimental design and manipulate the manager’s accountability for performance
(obliged to explain unexpected performance or not) and the transparency of the manager’s incentives (transparent versus
opaque). In the accountable conditions, if there is a significant deviation between their report and actual performance, man-
agers are required to provide an explanation addressing the discrepancy.3 In the transparent conditions, managers are com-
pensated based on their reports for every period in the round whereas in the opaque conditions, managers are compensated
based on one of the four periods chosen by the manager. Owners do not know in advance which period the manager will pick
as the compensation period, which makes the managers’ behavior unpredictable. The extent to which managers are willing to
over-report their private signal of performance is our measure of managerial reporting bias. Owners’ payoffs are determined
based on how close their predictions are to actual realized performance.
We find, as predicted, that accountability reduces reporting bias when managers’ incentives are opaque, but not when
incentives are transparent. However, we find that the reduction in reporting bias is cosmetic in that managers are more
biased in the compensation period (to maximize their payoff) and less biased in the other periods (to minimize the need
to explain themselves). Also, as predicted, managers’ payoffs are higher in the opaque conditions than in the transparent con-
ditions. Contrary to our predictions, we find that owners’ payoffs are invariant across conditions. We expected that owners
would be better able to adjust for managers’ biased reports when managers’ incentives are transparent. However, we find
that owners act as if accountability will constrain managers’ reporting bias both in the transparent and opaque conditions.
In other words, owners’ reliance on accountability appears to be misplaced. Our findings have implications for regulators
who view increased accountability and transparency as an antidote to some of the problems associated with manager-
owner conflicts of interest.
The remainder of the paper is organized as follows. In Section 2, we develop a framework and provide testable hypothe-
ses. In Section 3, we describe the research method, including the experimental design, participants, and procedures. Section 4
presents the results. Lastly, we offer concluding remarks, provide implications for practice, and make suggestions for future
research.
2. Theory and hypotheses
The Sarbanes-Oxley Act of 2002 aims to promote greater accountability and transparency in the financial-reporting pro-
cess (Coates, 2007). The terms accountability and transparency are routinely used by the popular press and regulators in the
aftermath of financial crises with the underlying implication that more accountability and transparency could reduce oppor-
tunistic managerial behaviors that lead to such crises (e.g. Turner, 2001; Morgenson, 2008). Yet, the terms accountability and
transparency are poorly defined and prior research notes that it is important to define these terms precisely because their
meaning is contextually determined (Lerner and Tetlock, 1999; Barth and Schipper, 2008; Bushman et al., 2004). In the fol-
lowing sections, we define these terms as they apply to our study, provide background, and then develop our hypotheses.
2.1. Accountability
We define accountability as the expectation that one will be required to explain one’s actions to others (Lerner and
Tetlock, 1999; Sinclair, 1995). Specifically, in the context of our experiment, a manager is accountable when s/he is obliged
to explain any material deviation between reported and actual performance. A manager who is not obliged to provide an
explanation, regardless of the magnitude of deviation, is not accountable.4 Our notion of accountability draws on prior theo-
retical research in accounting, which posits that obliging managers to reconcile actual versus predicted performance (e.g., the
difference between estimated amounts and ex post realizations) can be a powerful mechanism to curb opportunistic reporting
(Lundholm, 1999, 2003). By reconciling such differences, managers are subjected to the scrutiny of others and apt to engage in
self-reflection, which fosters accountability (Cooley, 1922; Roberts, 2009).
Prior research in accounting shows that managers make explicit attributions, which identify the cause(s) of unexpected
performance (Bettman and Weitz, 1983; Staw et al., 1983). More importantly, investors assess the attributions provided by
managers and react to those explanations (Barton and Mercer, 2005; Kimbrough and Wang, 2014) suggesting that managers’
explanations matter to investors. The threat of owners’ disapproval introduces the possibility of negative social emotions,
including shame, guilt, and regret (e.g., Williams, 1993; Dana et al., 2006). The anticipation of negative emotions can serve
3
In real-world settings, managers typically explain their performance in far greater detail at the end of the year when they present audited reports than
during quarters when they present unaudited reports of performance. We explain this feature of our design in more detail in the experimental design section.
4
Being not accountable in the sense of not being compelled to provide an explanation for material deviations in performance is not the same as being
unaccountable. Clearly, managers have other contractual and non-contractual forms of accountability for performance, but our paper deals with one specific
form—being obliged to explain deviations between reported and actual performance. The primary objective of our accountability manipulation is to make the
manager feel the need to explain deviations, which, in turn, triggers the anticipation of affective reactions (described later in this section).
as a potent disciplining force, helping to foster and reinforce one’s sense of accountability (Malsch, 2014; Creed et al., 2014).
Overall, we expect that accountability will inhibit managers’ opportunism.
2.2. Transparency
Barth and Schipper (2008) note that transparency is not well-defined in a financial reporting context. Lang et al. (2012,
735) acknowledge that ‘‘transparency is inherently difficult to measure and has many potential facets.” In this paper, we are
interested in a specific facet of transparency—the transparency with which managers’ incentives are disclosed. We define
managers’ incentives as transparently disclosed when those incentives are readily understandable to those using the disclo-
sure (Barth and Schipper, 2008; Bloomfield, 2002). If managers’ incentives are not readily understandable, we consider the
disclosure opaque. In the context of our experiment, we view managers’ incentives as transparently disclosed when the link-
age between the manager’s incentives and reported performance is definite and plainly laid out, such that the manager’s
actions are foreseeable. By comparison, we consider the disclosure opaque when the linkage is vague and equivocal, so that
the manager’s actions are difficult to anticipate.
Considerable empirical variation exists between companies when it comes to transparency of compensation disclosures
(e.g., Kalyta, 2009; Muslu, 2010). In some cases, the compensation disclosures are transparent and in others, they are opaque.
For an empirical analog to our definition of transparency, consider 10b5-1 plans adopted by companies. These plans allow
corporate insiders to commit to a trading plan wherein they pre-commit to sell or buy securities of their company on a spec-
ified timetable to pre-empt claims of insider trading. Some companies choose to make the details of these plans public
whereas others do not (Jagolinzer, 2009). According to our definition of transparency, companies that publicly announce
the details of their 10b5-1 plans are transparent whereas those that do not are opaque.5
Aboody and Kasznik (2000) document that many firms have a fixed schedule for awarding options to their CEOs; about
half their sample firms had award dates that were nearly identical every year (transparent) which means that for the other
half of their firms, option award dates are hard to predict (opaque). This difference is important because Aboody and Kasznik
show that CEOs of firms with scheduled awards make opportunistic voluntary disclosures that maximize their stock option
compensation.
When the relation between managers’ incentives and financial projections is unambiguous and straightforward (trans-
parent), managers’ reporting behavior is predictable-owners recognize that managers’ reports, in all likelihood, are biased
in all periods. However, when managers’ incentives are opaque, managers have incentives to over-report in some periods
and under-report in others.6 For instance, a manager in the Aboody and Kasznik setting may have strong incentives to misre-
port performance in the period preceding their option awards, but no incentive to misreport in other periods. Assuming the
investor does not know what the option award period is (the opaque firms), the manager may compensate for his bias around
the option award period with an offsetting bias in other periods. The lack of predictability makes managers’ behavior tough to
anticipate and the owners’ task of adjusting for managers’ bias more complicated in the opaque conditions.
2.3. The joint impact of accountability and transparency on conflicts of interest
As discussed previously, we expect that accountability can be an effective restraint on managerial opportunism. However,
we posit that the effectiveness of accountability in curbing managers’ opportunistic reporting depends on the how transpar-
ently managers’ incentives are disclosed. When managers’ incentives are transparently disclosed, we expect that managers
feel morally licensed to exploit their information advantage to the fullest. The negative affect associated with having to
explain why they took advantage of the owners is considerably diminished—thus, accountability is unlikely to constrain
managers’ reporting bias (Cain et al., 2005, 2011; Loewenstein et al., 2011). However, when managers’ incentives are opaque,
accountability could act as a constraining force that tempers managers’ reporting bias because social norms prevent man-
agers from fully exploiting their information advantage, particularly when owners are uninformed (Sharma, 1997;
Bicchieri, 2010; Bicchieri and Santuso, 2015; Creed et al., 2014). Formally:
H1a. Accountability reduces managers’ reporting bias when managers’ incentives are opaque, but not when managers’ incentives
are transparent.
In a survey of the literature on accountability, Lerner and Tetlock (1999, 270) warn that accountability may not be a pana-
cea for self-serving behavior.7 Therefore, if managers are able to report numbers aggregated across periods that show little or
no bias without affecting their monetary payoffs, we expect that any reduction in reporting bias will be cosmetic. That is,
5
Also see Cohen et al. (2012) who distinguish between routine insider traders and opportunistic traders. They define a routine trade as an insider who places
a trade in the same calendar month for at least three consecutive years and opportunistic traders as everyone else, that is, those insiders for whom they cannot
detect an obvious discernible trading pattern based on the past timing of their trades. This classification of routine versus opportunistic traders is in the same
spirit as our transparent versus opaque disclosure of incentives.
6
The incentive to under-report in some periods and over-report in other periods arises particularly in settings where managers’ accountability for
performance spans multiple periods instead of every single period, a point we return to our design section.
7
‘‘This review underscores the falsity of the conventional wisdom. . .. . ..that accountability is a cognitive or social panacea . . . in short, accountability is a
logically complex construct that interacts with characteristics of decision makers and properties of the task environment to produce an array of effects—only
some of which are beneficial."
managers will over-report in compensation periods (to maximize their payoffs) and under-report in other periods (to minimize
the need to explain themselves) when incentives are opaque.8 Therefore, we expect that the variability in managers’ reporting
bias will be higher when managers’ incentives are opaque. We expect that managers in the opaque condition will seek to offset
their reporting bias when it is possible to do so to avoid the negative affect associated with opportunistic behavior. Managers in
the transparent condition, however, should not feel the need to use gaming to adjust their reports because they have made their
incentives explicit, thereby putting the owners in a caveat emptor (buyer beware) mode.
H1b. Managers’ reporting bias is more consistent across periods when incentives are transparent and less consistent across periods
when incentives are opaque, regardless of accountability.
We next turn to how we expect managers’ and owners’ payoffs to be jointly impacted by accountability and transparency.
When managers’ incentives are transparently disclosed, we expect that managers will bias their reports to the fullest extent
possible and owners will recognize the bias and adjust for it. Prior research suggests that self-interested behavior is expected
in settings where managers’ incentives are made explicit (Rankin et al., 2008; Hoogervorst et al., 2011; Maas and Van
Rinsum, 2013). Owners are not interested in an explanation for differences between predicted and actual performance
because they infer, regardless of the explanation offered, that any differences are due to managers’ opportunistic reporting
choices. In other words, owners are likely to discount accountability when managers’ incentives are transparent.
When managers’ incentives are opaque, however, it is unclear to owners when to adjust managers’ reports and how much
to adjust. Because managers’ incentives do not provide a clear basis to the owners about managers’ actions, we expect that
owners’ adjustments to managers’ reports will be erratic when managers’ incentives are opaque, regardless of accountability.
Formally:
H2a. Owners’ payoffs will be higher when managers’ incentives are transparent than when they are opaque, regardless of
accountability.
Managers’ payoffs will be higher when their incentives are opaque than when they are transparent because owners do
not have a clear basis to adjust managers’ reporting bias when managers’ incentives are opaque, as described above.
Formally:
H2b. Managers’ payoffs will be higher when their incentives are opaque than when they are transparent, regardless of
accountability.
3. Research method
3.1. Overview
We use an experimental economics approach to study the fundamental conflict of interest between managers and owners
in a financial-reporting setting. Incentives are misaligned such that managers prefer to manipulate reported performance,9
whereas owners desire an accurate report. Managers have an informational advantage and, thus, are able to misstate perfor-
mance, suppressing fiduciary responsibility.
We construct an experimental setting that includes a manager and a cohort of owners. The manager is endowed with
private information about performance and, then, publicly issues a report. Owners observe the manager’s report and, then,
independently come up with their own estimate of performance. We employ a 2 2 experimental design and manipulate
the manager’s accountability for performance (obliged to explain unexpected performance versus not allowed to comment
on unexpected performance) and the transparency with which manager’s incentives are disclosed (transparent versus opa-
que). Our experimental manipulations correspond to the empirical variation in firms’ propensity to provide explanations for
unexpected performance (accountability manipulation) and the variation in the transparency of managers’ incentives (trans-
parency manipulation). Empirical analogs to our manipulations are provided in the section when we discuss the manipula-
tions in greater detail.
3.2. Participants
We recruit 93 students from a large Canadian university to participate in the study. We conduct 20 experimental sessions,
where each session includes a cohort of four or five participants. The cohorts are comprised of one manager and three or four
8
Consider a manager who reports performance in four periods every year. The managers’ compensation is based on every single period in the transparent
condition whereas in the opaque condition, the manager can pick any one of the four periods as his compensation period. Owners do not know which period the
manager will pick (this is similar to the manager in Aboody and Kasznik whose stock option award dates vary from year to year). In both the transparent and in
the opaque conditions, however, managers who are accountable are required to explain any significant performance deviations only at the end of four periods.
Consequently, a manager can offset the over-reporting in one period with under-reporting in other periods to minimize the need to explain himself.
9
The experimental materials use the term outcome rather than performance. For exposition, in the text we use the term performance to denote any outcome
measure that is periodically communicated by managers to owners. While earnings represent one such measure, our setting accommodates other outcome
measures as well.
owners. Seven sessions have three owners, and 13 sessions have four owners. The mean age of participants is 21.4 years. All
participants are in at least their third year of undergraduate studies in business, with the vast majority concentrating in
accounting or finance. Students earn, on average, $43.42 (Canadian) for participating approximately 90–105 min.
3.3. Procedures
Prior to administering the experimental sessions, participants are assigned a role (manager or owner) and directed to a
room location.10 Logistically the manager arrives at one room and the owners at another. An experimenter distributes the
instructions and reads them aloud. The instructions are the same, regardless of participants’ role, except the manager receives
additional information, which provides details about the (private) signal of expected performance.11
Each experimental session proceeds for five rounds, comprised of four periods per round. The rounds are analogous to
years, and the periods are analogous to quarters. The number of rounds is not announced beforehand to avoid end-game
effects, but participants are informed that the session will not last longer than 120 min.
The experimental instructions outline the procedures that take place each period/round. Participants are informed that
the realized performance per period is generated from a normal distribution with a mean of 200 and a standard deviation
of 50. The instructions state that realized performance per period is between 150 and 250 68.3 percent of the time and
between 100 and 300 95.5 percent of the time.
At the beginning of each period, the manager receives a signal of the period’s expected performance. The signal (S) equals
realized performance (R) plus a random error term (e). The error term is generated from a normal distribution with a mean of
zero and a standard deviation of 20. The manager is informed of the specifics of the distribution and is provided with obser-
vations from ten practice trials, including the manager’s signal (expected performance) and realized performance. Because
the error term is mean zero and normally distributed, the signal represents the manager’s unbiased estimate of realized per-
formance for the period. Owners know that the manager has information about the specifics of the error term, but nothing
more.
After observing the signal, the manager reports performance (Rpt).12 The reported amount cannot exceed ±20 of the sig-
nal.13 An experimenter takes the manager’s report to the room in which the owners are located and announces the reported
amount. The owners then individually estimate the realized performance (Est) for the period. After all have recorded their esti-
mate, an experimenter determines the median estimate (EstMed) and announces it publicly. Further, the manager is informed of
the realized performance for the period. Owners, on the other hand, are not informed of the realized performance per period
until round end.14
The manager and owners keep track of relevant information on record sheets throughout the course of the experiment.
The manager records the signal of expected performance and reported performance on a period-by-period basis. The owners
record the manager’s reported performance and their estimate of performance on a period-by-period basis. At round end,
owners learn the realized outcome per period and enter the amounts on their record sheet.
Owners have an incentive to estimate the realized performance accurately on a period-by-period basis. Owners’ compen-
sation per period (PayOwner) is computed as follows.15
PayOwner ¼ constant jEst Rj;

bounded at zero from below. Hence, owners’ compensation increases as their absolute estimation error approaches zero.
The manager, on the other hand, has an incentive to strategically inflate owners’ expectation of realized performance. We
vary the specific form of the manager’s compensation to manipulate the transparency of incentives (described below). In our
setting, the transparency of incentives is deemed transparent as long as the form of the manager’s compensation leads to
obvious and predictable reporting behavior each period. Otherwise, the transparency of incentives is opaque.
At the conclusion of the final round, participants complete a post-experiment questionnaire designed to collect demo-
graphics and information about the experiment. Next, participants compute their payment: they multiply experimental
earnings by a conversion rate specified at the beginning of the experiment. Then, participants are paid and dismissed. The
10
The experimental instructions do not use the terms manager and owner. Rather, participants are referred to as sender and predictor. We use generic
language to avoid potential confounds introduced by terminology.
11
The instructions are available from the authors upon request.
12
Managers’ performance reports are analogous to the output of an accounting system that reports underlying economic performance with error whereas the
actual realization at the end of each period/round represents true economic performance.
13
Owners are informed of this constraint: that is, the manager’s report of projected performance is bounded by ±20 of the noisy signal. We chose ±20 because
it is 10 percent of the mean of the distribution used to determine realized performance and, under generally accepted accounting principles, amounts in excess
of 10 percent typically are considered to be material (i.e., not permissible) and, therefore, more likely to invite auditor scrutiny.
14
Presumably, the manager has private information about the accuracy of estimates accrued in interim financial statements (e.g., income tax expense,
warranty expense, inventory allowances and returns, executive bonuses, site restoration costs, etc.). The accuracy of such estimates is eventually revealed to
owners, but a lag occurs. For design purposes, we assume that owners learn the accuracy of managers’ estimates, summarized in periodic performance reports,
at round end.
15
Note that owners cannot compute their earnings until round end: that is, until the realized performance for each of the four periods in the round is
revealed.
Table 1
Experimental setting.
Panel A: Experimental procedures

Beginning of experimental session
1. The manager is in one room and the owners are in another room.
2. Instructions are distributed and read aloud.
3. All participants are informed of the distribution used to determine the realized performance.
4. The manager is provided with information on the distribution of the error term (e) used to determine the relation between the signal and the
realized performance.
Each period
1. The manager receives a signal of expected performance (S).
2. The manager chooses the reported amount (Rpt).
3. The owners observe the manager’s report and individually estimate performance (Est).
4. The manager is informed of the realized performance (R).
5. The manager and owners are informed of the median estimated performance (EstMed).
6. For the opaque incentive treatment, the manager decides whether to choose the current period to determine compensation. Once a period is
chosen, it is announced to the owners.
End of round
1. The owners are informed of the realized outcome for the four periods.
2. If an explanation is required, the manager chooses an explanation when reporting inaccuracies, cumulated over the course of a round, exceed a
threshold.
3. The manager and owners compute their earnings.
Panel B: Experimental parameters
Manager’s compensation per period
Transparent incentives treatment PayMgr|Transparent = 15 + (EstMed S), bounded below at 0
Opaque incentives treatment PayMgr|Opaque = 4 [15 + (EstMed S)] or 0,
where themanager chooses one period to determine compensation for the round
Owner’s compensation per period PayOwner = 35 |Est R|, bounded below at 0
Realized performance R = N(200,50)
Signal of performance S=R+e
Error term associated with signal e N(0,20)
Manager’s reporting threshold S 20 Rpt S + 20
P4 P4
Threshold for providing an explanation for reporting discrepancies t¼1 ðS RptÞ > 20 or t¼1 ðS RptÞ > 20
experimental procedures and parameters (discussed further below) are summarized in Panels A and B, respectively, of
Table 1.
3.3.1. Accountability manipulation

We make managers accountable by obliging them to explain significant reporting discrepancies at round end. Reporting
discrepancies are differences between reported and realized amounts, cumulated over the four periods per round. The dis-
crepancies are significant if the cumulative difference between reported and realized performance exceeds 20. In computing
the cumulative amount, the difference per period is signed, so a difference of +10 in one period cancels out 10 in another
period. Essentially, in our setting, managers are accountable for annual performance deviations (cumulated over four quar-
ters) that deviate from expected performance by a specified threshold.16
To explain reporting discrepancies, the manager chooses from the following menu: (a) apologizes for the discrepancies
(acknowledges blame), (b) attributes discrepancies to circumstances beyond control (denies blame), or (c) states that an
explanation is not being provided.17,18 We require the manager to choose from this menu in order to maintain control over
the content of the explanation. Furthermore, a choice is required whenever the absolute cumulative reporting discrepancy
exceeds 20. The manager’s choice is then announced to owners. By requiring a statement to explain significant discrepancies,
managers are held accountable for their reporting behavior. For participants in the no accountability treatment, the choice of an
16
Our manipulation of accountability does not impose a financial cost on the manager. The impact of imposing a financial cost on managers if actual
performance deviates significantly from reported performance is an empirical question beyond the scope of this study.
17
Research in social psychology is mixed concerning the most effective response. Bottom et al. (2002) suggest that an apology can mitigate punishment. But
the apology can backfire if it is perceived as manipulative or insincere (Skarlicki et al., 2004). Denial also can be effective in preserving one’s standing with
others, but it must be plausible (e.g., Kaplan and Reckers, 1993; Barton and Mercer, 2005). Not commenting may be preferable if the other explanations cannot
be conveyed credibly over time. It is beyond the scope of the current study to empirically examine what type of explanation is most effective.
18
Our view of the accountability construct relies on the idea that accountability implies answerability-even if the answer is for managers to say that they
have no explanation / comment. We believe that a manager who is forced to acknowledge the deviation between actual and predicted performance is
accountable even if he/she does not offer a specific explanation.
explanation is absent. The manager is not obliged, nor even allowed, to offer an explanation for significant performance devi-
ations. At round end, the owners simply learn realized performance on a period-by-period basis.
Requiring managers to explain discrepancies between reported and realized amounts only if the cumulative reporting
discrepancy (summed across all periods in a round) exceeds a threshold allows managers to offset over-reporting in one per-
iod with under-reporting in one (or more) periods to ensure that they can avoid having to explain themselves. We made this
design choice for two reasons. First, quarterly reports (analogous to periods in our experiment) are unaudited whereas
annual reports (analogous to rounds in our experiment) are audited.19 Prior research suggests that annual reports differ from
interim reports in that annual reports are more heavily scrutinized (Palepu, 1988; Brown and Pinello, 2007). Therefore, we
believe that this design choice maps into an institutional feature of the financial reporting setting. Second, a key premise under-
lying our interaction prediction (H1a) is that managers whose incentives are opaque would be more averse to providing an
explanation (and, therefore, engage in this offsetting behavior) relative to managers whose incentives are transparent. Our
design choice (allowing managers to offset their bias in non-pay periods to avoid having to provide an explanation) allows
for a more powerful test of this underlying premise.20
Empirically, there is considerable variation in whether or not firms provide explanations for unexpected performance
(Bettman and Weitz, 1983; Staw et al., 1983). For a sample of nearly 2000 press releases of firms that have both positive
and negative earnings surprises, Kimbrough and Wang (2014) report that nearly 20 percent of firms provide no explanations
(attributions) for performance. Thus, not all firms hold themselves accountable to explain the deviation between their pre-
dicted and reported performance. In our experiment, accountable managers correspond to firms that provide an explanation
for performance deviations, and managers who are not accountable correspond to firms that do not provide an explanation
for performance deviations.21
3.3.2. Transparency manipulation

Owners know the specific form of the manager’s compensation in the transparent and opaque conditions. What differs is
whether knowledge of the compensation plan provides an unambiguous and well-defined basis to predict the manager’s
reporting behavior. In the transparent condition, the manager’s compensation per period is computed as follows.
PayMgrjTransparent ¼ fixed wage þ ðEstMed SÞ;
bounded at zero from below. In this case, the manager has an incentive to inflate owners’ estimates of performance each
period above their unbiased expectation of performance (S): that is, to the greatest extent possible over the course of a
round. The manager’s compensation increases as owners’ median estimate of performance (EstMed) increases.
In the opaque condition, on the other hand, the manager’s compensation is based on only one period per round, specified
by the manager. Using the specified period, the manager’s compensation is computed as follows.
h i
PayMgrjOpaque ¼ 4 fixed wage þ ðEstMed SÞ :
The other three periods in the round do not affect the manager’s compensation. In this case, the manager has an incentive
to inflate owners’ expectations one of four periods and owners have more difficulty anticipating reporting behavior. Proce-
durally, the manager is informed of the owners’ median estimate of performance at period end. The manager then elects
whether to choose the current period to determine compensation. The manager may defer to a future period, but cannot
return to a previous one. Once a period is chosen, it is announced to owners at the beginning of the next period. The proce-
dures for each period within a round are similar.
Our manipulation of transparency is more accurately characterized as a manipulation of the transparency of managers’
incentive structure which, in turn, alters the predictability of managerial behavior. In the transparent conditions, owners have
a clear basis to predict manager’s behavior (a rational manager will overstate in every period) whereas in the opaque con-
dition, owners lack a clear basis to predict managers’ behavior with respect to bias (it is not immediately obvious when a
manager will overstate or what a manager will do in the other periods). However, in the interest of simplicity, we charac-
terize this as a manipulation of transparency and acknowledge that this is a stylized definition of transparency, but one that
has empirical analogs.
Empirically, our transparency manipulation corresponds to settings where there is uncertainty surrounding managers’
reporting behavior driven by the timing of managers’ incentives. Aboody and Kasznik (2000) examine CEO option award
schedules for a sample of 1264 firms and find that 45% of the firms award options on a fixed schedule and the rest award
options on a variable schedule. For the fixed schedule firms, option award dates are the same every year whereas for the
19
We acknowledge that although quarterly reports are unaudited, they are subject to review by auditors, thus limiting managers’ ability to misrepresent at
will. The limit we impose on managers’ ability to misrepresent in each period (±20) captures this feature.
20
Had we used absolute bias in each period instead of net bias (cumulated over four rounds) as the basis for providing an explanation, we may still have
detected a difference, although our ability to detect this difference would be reduced. Managers would have overstated in the ‘‘pay period” and, perhaps, chosen
to simply report truthfully in the other periods (rather than underreport because they have no further incentive to offset). We acknowledge that this stylized
feature could be driving our results, but we expect that the results would be directionally similar.
21
We are not aware of a systematic examination of the antecedents of firms that provide (or do not provide) explanations for deviations between actual and
expected performance. One exception is pointed out by Lev and Gu (2016, p. 228) who state that ‘‘the most comprehensive comparison of estimates and facts
can be found in property and casualty insurance companies, which fully disclose their claim loss reserve revisions for 10 years.”
variable schedule firms, option award dates cannot be readily discerned. The key result in Aboody and Kasznik (2000) is that
CEOs with fixed award schedules hold back good news and rush forward bad news around option award dates to depress
stock prices because stock options are typically awarded with an exercise price that equals the stock price on the award date.
They interpret this behavior as evidence of managerial opportunism around option award dates that maximizes managers’
stock option compensation. Managers in our transparent conditions who have an incentive to overstate in every period cor-
respond to the CEOs with fixed award schedules whereas managers in our opaque condition whose incentives cannot be
readily discerned correspond to managers with variable award schedules.22
4. Results
4.1. Managers’ reporting behavior
H1 posits that accountability tempers managers’ opportunistic reporting, but only when managers’ incentives are opaque.
Panel A of Table 2 presents the average reporting bias per period, partitioned by experimental condition. Reporting bias is
defined as the difference between the managers’ reported amount and the managers’ signal of expected performance, so pos-
itive amounts are consistent with opportunistic reporting choices. The descriptive data indicate that, in every case, the aver-
age reported amount exceeds the expected performance: that is, managers report opportunistically, which should not be
surprising. However, the average reporting bias per period is much lower in the accountable/opaque incentives condition
than in the other three experimental conditions. Additionally, the average reporting bias per period is lower when incentives
are opaque than when they are transparent. Panel B of Table 2 presents the average cumulative reporting bias per round. The
cumulative bias is computed by summing reporting bias across the four periods within a round and dividing by four. The
descriptive data are very similar to those shown in Panel A.
To formally test hypotheses H1a, we perform a mixed-model analysis using maximum likelihood estimation (e.g., Greene,
1997). The dependent variable is the reporting bias per period. The independent variables include accountability, trans-
parency of the managers’ incentives, the interaction term, and a covariate to control for managers’ signal of expected per-
formance. We include the covariate because it potentially could affect managers’ propensity to misreport. The realized
performance per period is drawn from a known distribution, and a reported amount that falls in the upper tail of the distri-
bution may be seen as less credible. Our analysis also controls for period, round, and participants’ cohort (session).
The mixed-model results, shown in Panel A of Table 3, indicate that accountability, transparency, and the interaction term
are statistically significant at p 0.003. The covariate, on the other hand, is not statistically significant.23 An inspection of cell
means, depicted in Panel B of Table 2 suggests that the results are driven by the reporting choices of manager-participants in the
accountable/opaque incentives experimental cell. Overall, H1a is supported, suggesting that managers in the opaque conditions
are more averse to having to explain themselves compared to managers in the transparent conditions.
To investigate further, we analyze the simple effects of accountability on the manager’s reporting bias, holding the trans-
parency of incentives constant. We find that when the manager’s incentives are opaque, accountability has a significant
impact on reporting bias (F = 20.73, p < 0.001). Reporting bias is markedly lower for manager-participants who are account-
able (estimated marginal mean of 2.92) than for those who are not accountable (estimated marginal mean of 12.05), which is
consistent with H1a. Conversely, we find that when the manager’s incentives are transparent, accountability does not have a
significant impact on reporting bias (F = 0.13, p = 0.722). Reporting bias is similar, regardless of whether manager-
participants are accountable (estimated marginal mean of 12.75) or not accountable (estimated marginal mean of 13.26).
H1b predicts that managers’ reporting bias is more consistent across periods when incentives are transparent than when
incentives are opaque. We compare variances across our incentive conditions using the Levene’s test (untabulated) and
reject the null that the two variances are equal (F = 30.406, p < 0.01). The variance is significantly higher for the opaque treat-
ment (232.93) than it is for the transparent treatment (145.42) supporting H1b. When managers’ incentives are transpar-
ently disclosed, the variance in managers’ bias does not differ based on accountability (F = 0.002, p = 0.963). In other
words, the reporting bias is more or less stable regardless of accountability. By contrast, when managers’ incentives are opa-
que, the variance in managers’ bias is marginally higher when managers are accountable than when they are not (F = 1.871,
p = 0.086, 1-tailed). Overall, it appears that managers are seeking to offset periods of high reporting bias (compensation peri-
ods) with periods of low bias (post-compensation periods) to minimize the need to explain themselves. It is noteworthy that
managers seek to reduce the overall bias even after it no longer impacts their payoff. Consistent with the literature on
accountability, this would suggest that managers care about accountability—not having to be in a position to explain them-
selves. However, managers’ concern for maximizing their payoffs appears to dominate their accountability concerns as we
explain next.
22
Other empirical settings corresponding to our manipulation of transparency include firms’ 10b5-1 plans (Jagolinzer, 2009) and insider stock trades (Cohen
et al., 2012). In both cases, managers’ incentives are concentrated in specific periods; in some firms, the timing of managers’ actions around these incentives can
be readily discerned (our transparent condition) whereas in others, they cannot (our opaque condition).
23
We repeat the analysis dropping the covariate and inferences are unchanged. In addition, we repeat the analysis using the manager’s cumulative reporting
bias per round as the dependent variable, controlling for round and participants’ cohort (session) in the analysis. The independent variables include
accountability, transparency of incentives, and the interaction term. Inferences are unaffected.
Table 2
Descriptive data: Managers’ reporting bias.
Panel A: Mean (standard error) reporting bias by period

Transparency Accountability Period Total
1 2 3 4
Opaque Accountable 7.68 1.04 2.60 0.44 2.94
(3.23) (3.09) (2.94) (3.05) (1.54)
Not accountable 12.08 5.76 12.32 7.04 9.30
(2.24) (3.22) (2.81) (3.14) (1.45)
Transparent Accountable 9.16 13.72 10.80 8.36 10.51
(2.70) (1.94) (2.18) (2.72) (1.20)
Not accountable 13.40 10.36 10.76 10.88 11.35
(1.95) (2.56) (2.47) (2.75) (1.21)
Panel B: Mean (standard error) cumulative reporting bias by round
Transparency Accountability Round Total
1 2 3 4 5
Opaque Accountable 3.00 18.00 14.60 12.00 17.20 11.76
(7.01) (21.06) (2.42) (7.66) (13.74) (5.23)
Not accountable 36.20 19.40 48.20 38.20 44.00 37.20
(10.11) (16.97) (10.63) (14.30) (9.26) (5.52)
Transparent Accountable 24.20 28.40 47.40 46.60 63.60 42.04
(17.85) (13.91) (13.67) (8.08) (15.90) (6.51)
Not accountable 21.20 45.80 58.00 35.20 66.80 45.40
(18.04) (14.76) (10.79) (15.21) (4.95) (6.43)
Notes: The table summarizes managers’ reporting bias across rounds and periods. Panel A presents the manager’s reporting bias per period, partitioned by
experimental condition. Reporting bias is computed as the difference between the manager’s reported amount and the manager’s signal of expected
performance. For each period, we sum across the five rounds and determine means and standard errors. For transparency, we manipulate whether the
manager’s incentives are opaque or transparent. With opaque incentives, the manager strategically chooses one of four periods as a basis for compensation.
With transparent incentives, on the other hand, the manager’s compensation is based on all four periods. For accountability, we manipulate whether the
manager is obliged to provide an explanation for cumulative reporting discrepancies that exceed a threshold. Panel B presents the manager’s cumulative
reporting bias per round, partitioned by experimental condition. Cumulative reporting bias is computed as the difference between the manager’s reported
amount and the manager’s signal of expected performance, summed over the four periods within a round.
We probe the reporting choices of managers who have opaque incentives. We focus on this condition because account-
ability is predicted to affect the reporting choices of managers with opaque incentives, but not those with transparent incen-
tives. Recall that with opaque incentives, the manager chooses one period as the basis for compensation. Panel A of Table 4
summarizes the frequency with which each period is chosen. We observe that managers who are accountable choose the 1st
period more often and the 3rd period less often as compared to managers who are not accountable. Indeed, a chi-square test
indicates that choosing the 1st period, as opposed to all other periods, is more likely to occur when the manager is account-
able for reporting discrepancies (v2 = 3.57, p = 0.059).
To gain further insight, we formally incorporate the timing of the compensation period in our analysis. The period chosen
is defined as period t; earlier periods are defined as Pre-t; and later periods as Post-t. We perform a mixed-model analysis,
where the dependent variable is the reporting bias per period. The independent variables include accountability, the relative
timing of the compensation period (Pre-t, t, and Post-t), the interaction term, and a covariate for the manager’s signal of
expected performance. The analysis controls for participants’ cohort (session).
The mixed-model results, shown in Panel B of Table 4, indicate that accountability, the timing of the compensation period,
and the interaction term are statistically significant at p < 0.05. An inspection of cell means, depicted in Panel C of Table 4,
suggests that accountability constrains the manager’s propensity to misreport in Pre-t and Post-t periods, but not in the com-
pensation period (t). We analyze the simple effects in order to interpret the significant interaction term. We find that when
the manager is accountable for reporting discrepancies, reporting behavior varies dramatically based on the timing of the
manager’s report (F = 16.30, p < 0.001). Bonferoni tests indicate that reporting bias is significantly higher in period t than
in the other periods (p 0.001), but does not differ significantly between the Pre-t and Post-t periods. In sharp contrast,
when the manager is not accountable, the timing of the compensation period is only marginally significant (F = 2.46,
p = 0.093). Moreover, Bonferoni tests fail to yield any significant pairwise differences at the 10 percent level. Our findings
suggest that, when managers have opaque incentives, they behave opportunistically in the compensation period, but
accountability reduces their propensity to misreport in other periods. Put simply, managers’ concerns about maximizing
their payoffs appear to over-ride their concerns about having to explain themselves.
4.1.1. Managers’ and owners’ payoffs

H2a predicts that owners’ payoffs will be higher when managers’ incentives are transparent than when they are opaque,
regardless of accountability. Panel A of Table 5 presents descriptive statistics for owners’ payoffs by treatment condition.
Table 3
Statistical results: Managers’ reporting bias per period.
Panel A: Mixed-model analysis

Source F-statistic P-value
Intercept 27.35 <0.001
Accountability 12.32 0.001
Transparency 10.60 0.001
Interaction 8.79 0.003
Signal 1.70 0.195
Panel B: Estimated marginal means by experimental condition
Notes: Panel A reports the results of a mixed-model analysis. The dependent variable is the manager’s reporting bias per period, computed as the difference
between the manager’s reported amount and the manager’s signal of expected performance per period. Positive reporting bias indicates that the manager’s
cumulative reported amount exceeds the unbiased expected amount. In the data analysis, transparency refers to the manager’s incentives (transparent
versus opaque), accountability refers to whether the manager is obliged to provide a statement regarding reporting discrepancies (accountable versus not
accountable), and signal refers to the manager’s signal of expected performance. Panel B depicts the estimated marginal means of the various experimental
conditions.
Contrary to our predictions, owners’ payoffs appear indistinguishable by condition. We follow up with an ANOVA (Panel B,
Table 5) which confirms that owners’ payoffs do not vary either by transparency or by accountability (all p’s > 0.30). H2a is
not supported.
One reason why owners’ payoffs are not significantly higher in the transparent condition could be that owners did not
adjust adequately for managers’ bias in the transparent condition as we expected. Koonce et al. (2010) find that investors
extend the benefit of doubt to managers in financial reporting settings where they attribute deviations between managers’
expected and actual performance to environmental factors and do not assign blame to managers for the inaccuracies. Untab-
ulated results show that managers increase their reporting bias over time in the accountable conditions particularly when
incentives are transparently disclosed. Owners seem to anticipate this behavior and adjust managers’ estimates downward,
specifically when managers are accountable and incentives are transparent. However, it appears that the extent of owners’
adjustment is inadequate to compensate for managers’ increased bias in the transparent condition.
H2b predicts that managers’ payoffs will be higher when their incentives are opaque than when they are transparent,
regardless of accountability. Panel A of Table 6 presents descriptive statistics suggesting that H2b is supported. Managers,
on average, make $51.22 in the transparent condition compared to $68.52 in the opaque conditions. We follow up with
an ANOVA which reveals a significant main effect of transparency on managers’ payoffs (F = 14.035, p < 0.01), but no effect
of either accountability or the transparency accountability interaction. In other words, managers appear to benefit from
opaque disclosure of incentives though owners do not appear to benefit from transparent disclosure of managerial
incentives.
4.1.2. Analysis of explanations chosen by managers

Recall that managers are required to provide an explanation only in the accountable conditions. Furthermore, an expla-
nation was required only if the cumulative difference (across all four periods in a round) between reported and realized per-
formance exceeded 20. Overall, managers chose to provide an explanation on 15 occasions (out of 25) in the transparent
treatment and on 9 occasions (out of 25) in the opaque treatment. In the transparent treatment, managers chose denial eight
times (they blame uncontrollable circumstances), silence five times (they offer no explanation), and an apology two times. In
Table 4
Additional results when the manager has opaque incentives.
Panel A: Frequency of chosen compensation period

Period Accountability condition
Not accountable Accountable
1 4 10
2 5 5
3 16 10
4 0 0
Panel B: Mixed-model analysis

Source F-statistic P-value
Intercept 10.31 0.002
Accountability 5.78 0.018
Timing 15.64 < 0.001
Interaction 3.21 0.044
Signal 2.05 0.155
Panel C: Estimated means by experimental cell
20
t
15
Estimated Means
10
Pre-t
5
Post-t
-5
Not Accountable Accountable
Notes: The analysis reported in this table is restricted to cases in which the manager’s incentives are opaque. In the opaque incentives condition, the
manager chooses one of the four periods as the compensation period. Once the period is chosen, it is announced to owners. Panel A summarizes the
frequency that each period is chosen as the compensation period. Panel B reports the results of a mixed-model analysis. The dependent variable is the
manager’s reporting bias per period, computed as the difference between the manager’s reported amount and the manager’s signal of expected perfor-
mance per period. In the data analysis, accountability refers to whether the manager is obliged to provide a statement regarding cumulative reporting
discrepancies (accountable versus not accountable), timing refers to whether the manager’s report occurs before the compensation period is chosen (Pre-t),
in the chosen compensation period (t), or after the compensation period is chosen, and signal refers to the manager’s private signal of expected perfor-
mance. Panel C depicts the estimated means of the pre-compensation, compensation, and post-compensation periods.
the opaque condition, managers chose denial five times, silence only once, and apologized three times. Overall, when an
explanation was required, denial seems to be the most common explanation across conditions. However, the limited number
of explanations precludes us from discerning a definitive pattern with respect to managers’ choice of explanations.
4.1.3. Learning effects

We check whether the magnitude of managers’ total reporting bias is a function of time (round) and find that the man-
agers increase their reporting bias over time when they are required to provide explanations (i.e., in the accountable condi-
tions; t = 2.06, p = 0.045, untabulated). However, managers’ bias within the accountable condition increases significantly
when incentives are transparently disclosed (t = 2.28, p = 0.032, untabulated), but not when incentives are opaque. This sug-
gests that managers learn that owners are not unwinding bias for asset reports in the high transparency/accountable con-
dition, and report more aggressively throughout the experiment. In other words, owners appear to be (inappropriately)
expecting that accountability will curb managerial opportunism even when incentives are transparently disclosed, and this
expectation is misplaced.
4.1.4. Post experiment questionnaire

A post-experiment questionnaire asks managers to characterize their reporting behavior on three 10-point scales, with
endpoints labeled misleading/truthful, selfish/altruistic, and unjust/fair. We perform three two-way analyses of variance
(untabulated) to test for differences between the experimental conditions. In all three cases, the interaction effect
Table 5
Descriptive data: Owners’ payoffs.
Panel A: Mean (standard deviation) payoffs by treatment condition

Accountability
Transparency Accountable Not Accountable Row Means
Transparent 39.94 38.25 39.12
(4.58) (4.12) (4.39)
n = 19 n = 18 n = 37
Opaque 39.19 38.31 38.70
(6.74) (5.72) (6.12)
n = 16 n = 20 n = 36
Column means 39.60 38.28
(5.59) (4.96)
n = 35 n = 38
Panel B: Analysis of variance: dependent variable: owners’ payoff
Source Sum of Squares df Mean Square F Sig.
Intercept 109835.371 1 109835.371 3849.826 0.000
Transparency 2.186 1 2.186 0.077 0.783
Accountability 29.920 1 29.920 1.049 0.309
Transparency accountability 3.007 1 3.007 0.105 0.746
Error 1968.567 69 28.530
Total 112539.440 73
Notes: The table summarizes owners’ payoffs. Panel A presents owners’ payments summed across all rounds, partitioned by experimental condition.
Owners are assigned to one of four conditions resulting from our manipulation of transparency and accountability. For transparency, we manipulate
whether the manager’s incentives are opaque or transparent. With opaque incentives, the manager strategically chooses one of four periods as a basis for
compensation. With transparent incentives, on the other hand, the manager’s compensation is based on all four periods. For accountability, we manipulate
whether the manager is obliged to provide an explanation for cumulative reporting discrepancies that exceed a threshold. Panel B presents an ANOVA with
owners’ payoff as the dependent variable, transparency, accountability, and the interaction term as independent variables.
Table 6
Descriptive data: Managers’ payoffs.
Panel A: Mean (standard deviation) payoffs by treatment condition

Accountability
Transparency Accountable Not accountable Row means
Transparent 51.92 50.52 51.22
(5.30) (10.49) (7.87)
n=5 n=5 n = 10
Opaque 67.20 69.84 68.52
(10.28) (13.52) (11.41)
n=5 n=5 n = 10
Column Means 59.56 60.18
(11.15) (15.29)
n = 10 n = 10
Panel B: Analysis of variance: dependent variable: managers’ payoff
Source Sum of Squares df Mean Square F Sig.
Intercept 71688.338 1 71688.338 672.346 0.000
Transparency 1496.450 1 1496.450 14.035 0.002
Accountability 1.922 1 1.922 0.018 0.895
Transparency accountability 20.402 1 20.402 0.191 0.668
Error 1705.988 16 106.624
Total 74913.100 20
Notes: The table summarizes managers’ payoffs. Panel A presents managers’ payments across all rounds, partitioned by experimental condition. Managers
are assigned to one of four conditions resulting from our manipulation of transparency and accountability. For transparency, we manipulate whether the
manager’s incentives are opaque or transparent. With opaque incentives, the manager strategically chooses one of four periods as a basis for compensation.
With transparent incentives, on the other hand, the manager’s compensation is based on all four periods. For accountability, we manipulate whether the
manager is obliged to provide an explanation for cumulative reporting discrepancies that exceed a threshold. Panel B presents an ANOVA with managers’
payoff as the dependent variable, transparency, accountability, and the interaction term as independent variables.
(accountability transparency) is statistically significant at p 0.055.24 When the manager is accountable for reporting dis-
crepancies and the manager’s incentives are opaque, reporting behavior is perceived to be more truthful (mean of 6.6), more
altruistic (mean of 6.2) and fairer (mean of 7.0) as compared to the other experimental cells.25 Thus, the combination of
24
The findings are striking because only 20 managers participate in the experiment (i.e., five per experimental cell).
25
For the other three cells, the mean response on each scale is at least 1.8 less.
accountability and opaque incentives affects the manager’s perception of reporting behavior – and such perceptions appear to
be reflective of actual reporting behavior.
Finally, as part of the post-experiment questionnaire, we ask manager-participants to indicate the extent to which they
experience various feelings throughout the course of the experiment, responding on 10-point scales with endpoints labeled
did not experience/strongly experienced. We find one statistically significant difference (p = 0.026): manager-participants in
the transparent conditions (mean of 2.3) indicate that they experience less regret than those in the opaque conditions (mean
of 4.5). This finding lends credence to our argument that, with transparently disclosed incentives, managers appear to
believe that they have moral license to behave opportunistically.
We also examine owner-participants’ responses to the post-experiment questionnaire. Owners are asked to indicate the
usefulness of the manager’s report (not useful at all/very useful) and to characterize the manager’s reporting behavior (mis-
leading/truthful, selfish/altruistic, and unjust/fair). Owners respond on various ten-point scales. We perform four two-way
analyses of variances to test for differences between the experimental groups. For usefulness, we find that accountability has
a statistically significant effect at p = 0.077. Owners respond that reported amounts are more useful when the manager is
accountable than not accountable (means of 6.6. versus 5.6, respectively). For reporting behavior, the interaction term is sta-
tistically significant at p 0.045 in all cases. Owners respond that the manager’s reporting behavior is more truthful (mean
of 5.8), more altruistic (mean of 6.0), and fairer (mean of 6.6) when the manager is accountable for reporting discrepancies
and incentives are opaque as compared to the other experimental cells. These responses suggest that owners appear to
believe managers’ explanations when managers’ incentives are opaque and disregard explanations when incentives are
transparent. However, this differential belief is not reflected in owners’ payoffs because payoffs are equivalent across trans-
parent and opaque conditions.
5. Conclusions
In this paper, we report the results of an experiment designed to examine the fundamental conflict of interest between
managers and owners in a financial-reporting setting. We investigate the role of accountability and transparency as potential
mechanisms to mitigate the adverse effects of such conflicts. We find that when managers’ incentives are transparently dis-
closed, managers tend to report opportunistically, regardless of whether they are held accountable for reporting discrepan-
cies or not.26 By comparison, when managers’ incentives are not transparently disclosed (i.e. opaque), accountability tempers
managers’ opportunism. We maintain that with opaque disclosure of incentives, accountability brings social norms to the fore-
front, suggesting that one should not capitalize on an unfair advantage. Failure to comply with such norms can trigger negative
affect (e.g., shame, guilt, and regret). Under such conditions, accountability appears to be an effective means to curtail managers’
opportunism because managers seek to minimize negative affect.
Although accountability tempers managers’ reporting bias when managers’ incentives are less transparent (opaque), we
find that this reduction in reporting bias comes about due to a form of window-dressing that is common in many accounting
settings. A significant part of managers’ compensation often hinges on specific events—stock option grants, sale of vested
stock etc., thereby creating incentives for managers to make opportunistic disclosures around these specific dates
(Aboody and Kasznik, 2000, Jagolinzer, 2009). In some case, these dates are well-known (transparent) to owners whereas
in others, the dates are not well-known (opaque). Although managers in the opaque condition apparently reduce their over-
all reporting bias, they accomplish this by increasing their biased reporting around compensation periods (to maximize pay-
offs) and decreasing biased reporting in non-compensation periods (to minimize the need to explain themselves). In other
words, the reduction in reporting bias due to accountability is cosmetic and managers’ financial incentives dominate report-
ing behavior. Future research could examine whether cautionary disclosures that alert investors to the potential for manage-
rial window dressing impact how investors process these reports.
We also find that managers’ payoffs are higher when incentives are opaque than when they are transparent because own-
ers are unable to adjust for the timing of managers’ bias. Contrary to our expectations, in our experimental setting, owners
anticipate that accountability reins in managers’ opportunism. But, as noted above, accountability does not affect managers’
reporting behavior when incentives are clearly disclosed. Under such conditions, owners’ beliefs that accountability damp-
ens managers’ opportunism may be misplaced. Future research could examine factors that moderate investor reliance on
managers’ reports in the presence of accountability. For instance, the growth of social media (e.g., Twitter) allows managers
to construct narratives and provides a direct channel where managers can provide explanations to investors for deviations
between reported and actual performance. Whether these channels amplify investor reliance on managers who are account-
able is an interesting question we leave to future research.
As noted in our experimental design section, our manipulation of transparency is stylized. Managers in our transparent
conditions are compensated based on all four periods in a round whereas managers in the opaque conditions are compen-
sated based on only one of the four periods. Although there are empirical analogs to our manipulation of transparency (par-
ticularly involving planned stock sales where managers’ incentives could be concentrated in a particular period), we
26
Although our findings are similar to Cain et al. (2011), our study differs in two important respects. First, unlike Cain et al. we consider the impact of
accountability. Second, in contrast to the Cain et al. finding that enhanced transparency effectively enhances the agent’s payoffs, we predict and find that
manager’s payoffs are lower (higher) in the transparent (opaque) condition.
acknowledge that our manipulation involves a specific type of transparency. Although the SEC implemented rules requiring
transparency in executive compensation in 2006 (SEC, 2006), research on antecedents (or determinants) of transparency is
sparse.27 Research that examines alternative versions of transparency could extend our understanding of how transparency,
more broadly, affects managerial behavior.
Our findings have implications for regulation that involves conflicts of interest. A recurring theme that runs through much
of regulation (Sarbanes-Oxley Act as well as the Dodd-Frank Act) calls for greater transparency and accountability vis-a-vis
increased disclosure. In principle, greater transparency and accountability are thought to curb managerial opportunism and,
thus, promote investor welfare. However, our findings suggest that managers may disregard accountability concerns when
disclosures surrounding conflicts of interest are clear and transparent. In such cases, adding more disclosure requirements in
an effort to bolster accountability may have little impact on managerial opportunism, but could lull owners into a false sense
of security. Interestingly, Jollineau et al. (2014) find that adding an accountability requirement, in itself, makes credit rating
agencies less biased, but adding accountability atop other initiatives designed to lessen conflicts of interest does not reduce
bias further. Our results suggest that adding other initiatives, such as transparent disclosure of managers’ incentives, may
actually undermine the effectiveness of accountability. Accordingly, regulators need to carefully consider both the intended
and unintended consequences of regulations aimed at alleviating conflicts of interest (Libby et al., 2015). We encourage
additional study along these lines.
Acknowledgements
We have acknowledged funding from the SSHRC in the acknowledgements. If you want to add a grant number, it is
435-2012-0100. There is no grant number associated with the Federal Reserve Bank of Atlanta funding.
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J. Account.

Public Policy xxx (xxxx) xxx

Contents lists available at ScienceDirect

J. Account. Public Policy

Full length article

The joint impact of accountability and transparency on

2. Theory and hypotheses

2.3. The joint impact of accountability and transparency on conflicts of interest

PayOwner ¼ constant jEst Rj;

Panel A: Experimental procedures

3.3.1. Accountability manipulation

3.3.2. Transparency manipulation

PayMgrjTransparent ¼ fixed wage þ ðEstMed SÞ;

4.1. Managers’ reporting behavior

Panel A: Mean (standard error) reporting bias by period

4.1.1. Managers’ and owners’ payoffs

Panel A: Mixed-model analysis

4.1.2. Analysis of explanations chosen by managers

Panel A: Frequency of chosen compensation period

Panel B: Mixed-model analysis

4.1.3. Learning effects

4.1.4. Post experiment questionnaire

Panel A: Mean (standard deviation) payoffs by treatment condition

Panel A: Mean (standard deviation) payoffs by treatment condition

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