Information Policies, Manager Discretion, and Managerial Opportunism

Employees in organisations are able to influence the welfare of managers. This study examines whether firms’ information policies and reward policies for employees can reduce managers’ rent extraction when those managers benefit from higher employees’ efforts. Results show that managers are less likely to extract rent under an open information policy, in which employees can observe manager behaviour, than under a closed information policy, in which employees cannot observe manager behaviour. The effect of the information policy on reducing rent extraction is larger when managers have discretion over rewarding their employees than when they do not have discretion. The results have important practical implications. Organisations can design policies to reduce managerial rent extraction without resorting to costly controls. An open information policy in which employees can observe manager behaviour produces more benefits when it is combined with a reward policy that grants managerial discretion over employee rewards.

This seminar is organised by the Erasmus Accounting Research Group.