Unintentional Bias and Managerial Reporting

Abstract

We examine the impact of unintentional biases in managerial judgment and in audited accounting information on the reporting of unverifiable private managerial information for stewardship purposes. Such biases are exogenous and irreducible; awareness of their existence does not eliminate bias or lead to heterogeneous beliefs—all agents have common, objective beliefs. We show that any biased managerial judgment in interpreting private information and negatively biased accounting (conservatism) reduce timely reporting of private managerial information by managers. Only positively biased (less conservative) accounting increases such reporting by managers. Contrary to conventional wisdom, negative accounting biases, instead of counteracting the effect of positive managerial bias, act to further reduce reporting by managers and, thus, the supply of timely information to capital markets. Thus, freedom from bias, both in managerial judgment and in accounting, more likely results in managers issuing timely reports.