DATA ANALYTICS CASE QUESTIONS

A437 – Spring 2024

Our case examines the revelation of private information – more specifically, individuals’ honesty
in a managerial reporting setting. There are three parts to the case, and there are 15 total questions.
Please answer each question to the best of your ability, and turn in your answers, via Canvas, no
later than 4.24.24. The data is in Excel, and you are welcome to use whatever program you wish
to analyze the data. You are also welcome to consult with others – after all, the focus is on learning.
Your answers, though, should be in your own words. Please do not hesitate to contact me if I can
be of any assistance to you. I hope that you enjoy the case – best wishes.

Part 1: Why is it important to examine individuals’ honesty in managerial reporting?

1. What is participative budgeting? What are the theoretical benefits and costs associated with
participative budgeting? Please consult Chapter 6 to help answer this question.

2. Why is it important to empirically (i.e., use data to) examine individuals’ honesty in managerial
accounting? Consider the fundamental agency problem (Chapter 4) and some of the in-class
exercises we have covered (e.g., #2, #15, and #23). Moreover, how might honesty affect
incentives and the tradeoff between decision making and control in a company’s managerial
accounting system?

3. Given the importance of honesty in participative budgeting and managerial reporting, one of
the most significant streams of research in managerial accounting has examined issues
surrounding the truthful revelation of private information (i.e., honesty). To examine these
issues, researchers frequently use controlled laboratory experiments, asking participants to
respond to questions via researcher-generated instructions with monetary incentives in place
that emulate real reporting settings.

Review the experimental instructions provided (under “data analytics case” in our Canvas
“files” folder). Complete the experiment and privately note your responses (do not share your
specific responses in your answer to this question). How do you think different participants
will respond? Why do you think they will respond that way?

4. The Post-Experimental Questionnaire contains a work experience question as well as an

assessment of the “Dark Triad” of personality traits. The Dark Triad represents three
dimensions of personality, which are: Narcissism, Psychopathy, and Machiavellianism.
Narcissism is characterized by a sense of grandiosity, entitlement, and superiority.
Psychopathy is characterized by high levels of impulsivity and thrill-seeking and low levels of
empathy. Machiavellianism is characterized by cynicism and a willingness to manipulate
others to succeed.

Complete the assessment and privately note your own score (do not share your specific
responses in your answer to this question). Why would a manager’s Dark Triad personality
score matter in a participative budgeting context and in work settings?
Part 2: Data analysis

Please refer to the Excel dataset, which mirrors what prior researchers have found, to help answer
the following questions. In the Excel dataset, you will find 500 observations. Fifty people
participated in the experiment, and there are 10 observations per participant. Moreover, each
participant completed 10 consecutive periods, where the cost draw changed each period. Review
the key tab for a description of each variable.

5. Create a column that shows the level of honesty for each observation. Calculate the percentage
of honesty as:

𝑃𝑎𝑦𝑜𝑓𝑓 𝐶𝑙𝑎𝑖𝑚𝑒𝑑
𝐻𝑜𝑛𝑒𝑠𝑡𝑦 = 1 –
𝑃𝑎𝑦𝑜𝑓𝑓 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒

𝑃𝑎𝑦𝑜𝑓𝑓 𝐶𝑙𝑎𝑖𝑚𝑒𝑑 = 𝑅𝑒𝑝𝑜𝑟𝑡𝑒𝑑 𝐶𝑜𝑠𝑡 – 𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑠𝑡

𝑃𝑎𝑦𝑜𝑓𝑓 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 = 6.00 – 𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑠𝑡

What proportion of participants are always honest and report the actual cost? What proportion
of participants are always dishonest and report the maximum cost of 6?

6. Calculate participants’ overall average level of honesty for the entire experiment. How does
this result compare to the predictions of agency theory? How does this result compare to your
expectations from part one? What do the results mean for performance evaluation and
contracting within the firm?

7. The experimental results suggest that, on average, managers neither maximize their monetary
payoff nor maximize their honesty levels. Provide a few reasons regarding why this might be
the case. What might cause a manager to report honestly in one scenario but not another? What
might cause a manager to submit a partially honest report?

8. Compute and compare the honesty levels for each of the 4 potential explanatory variables
(work experience, dark triad, actual cost, period). For work experience, dark triad, and actual
cost, compare the average honesty at or below the median of the variable to that above the
median (the medians for work experience, dark triad, and actual cost are 1, 3.25, and 5,
respectively). For the ordinal variable (period), compare the average honesty for each of the
10 periods.

For each of the 4 variables examined above, provide a graphical representation of the average
honesty for each level of the variable (i.e., at or below the median versus above the median for
work experience, dark triad, and actual cost; and, for each of the 10 periods). Identify the
variables that appear to make a significant difference in an individual’s honesty level (do not
run any statistical tests at this point).
9. Perform t-tests to statistically analyze each of the average differences from question 8. For
period, you will need to perform a regression analysis using the following formula:
Honesty = α1 + β1Period

10. From the analyses completed above, which variables are significantly related to an individual’s
honesty in the experiment? How might firms use this information?

11. The contract examined in the experiment is referred to as a “trust” contract because the firm
relies on managers’ honest reporting. Firms, though, often use what is referred to as a
“modified trust contract.” In a modified trust contract, firms set a production hurdle – the way
this works is that if the reported cost is low, then production will be funded at the reported cost,
but if reported costs are high, then production will not be funded. The optimal hurdle point in
our experiment is 5 – so, if the manager reports less than 5, then production will be funded (the
manager will receive the requested cost amount) – if the manager reports a cost greater than 5,
then production will not take place.
Expected profit under the trust contract examined in the experiment is: -250 + (1,000 × %
Honesty.)
And, expected profit under the modified trust contract is: 250 + (250 × % Honesty.)

Present a graphical depiction of expected firm profit (y-axis) as a function of manager honesty
(x-axis) for both the trust and modified trust contracts. At the overall average level of honesty
observed in the trust contract, which contract would earn the firm more profit? At which point
will the firm earn the same profit under both contracts? When would the firm earn more profit
under the trust contract than the modified trust contract?

12. Think about examples of Trust and Modified Trust Contracts from your experience or that you
might expect being implemented at a company. Describe at least one example of such a
contract (hint: think about how capital budgeting works).

Part 3: Next steps

13. To what extent do you believe the experiment captures “honesty?” What are the strengths and
weaknesses of using an experiment to measure honesty?

14. How might you extend this study? Think about other ways a firm might encourage and/or
incentivize honest managerial reporting. Think about both formal controls and processes
within the managerial accounting system as well as informal factors outside of the managerial
accounting system.

15. A significant body of research examines managerial accounting issues using controlled
laboratory experiments and field studies. What other important managerial accounting
questions do you think researchers and organizations could answer using experiments or field
studies?