Influence

In this section, we discuss the theoretical and practical implications of our findings, as well as limitations and avenues for future research.

Theoretical and Practical Implications

Our study is positioned at the intersection of two streams of research that are interconnected but have hitherto developed independently: one on ethical leadership, and another on leading by example. In bridging these two branches of literature, our findings contribute to both.

First, we draw attention to one crucial aspect of ethical leadership - i.e., truthful financial reporting decisions - and its influence on workers' behaviors. Prior experimental evidence has revealed a positive leader effect on followers' behaviors in voluntary contribution games; nonetheless, leaders' reporting choices are either exogenously imposed, or implicitly assumed given that the leader acts as a first mover. Closely related to our research, D'Adda et al. show that leaders who cheat less reduce cheating among workers. However, D'Adda et al. exclusively used the mere action of cheating as a proxy for unethical behavior, neglecting the key role of reporting choices. Our results provide unique insights into this discussion by (i) moving the focus away from the direct analysis of cheating to its key antecedent, i.e., the ex-ante reporting choice, and (ii) establishing the effect of assigned vs voluntarily chosen leaders' reporting choices on workers' actions. Importantly, our findings refine the predictions of leading by example and social learning theories. In line with those theories, we show that observing a leader's non-manipulative reporting choice also makes workers significantly more likely to choose the ethical reporting method. Even workers who choose self-reporting tend to cheat less when their leaders chose automatic reporting. However, this occurs only when the leader makes a voluntary choice and can punish or reward workers.

These findings suggest that to prevent earnings manipulation in organizations, leaders must have latitude in signaling their vision to workers and power to assign economic incentives. Regulations or laws that mandate non-manipulative reporting at the managerial level may not effectively encourage workers to adhere to such ethical standards. Rather, leaders should be able to actively promote the behaviors that they expect workers to embrace.

Second, prior research on ethical leadership has generally focused on the effect of leaders on subordinates and organizations. Here, we redirect scholarly attention toward leaders' own behavior. Drawing on theories of role modeling and social identity, the literature has generally revealed an optimistic view about leaders. Yet, given the many high-profile corporate scandals such as Volkswagen, Enron, Tyco, and WorldCom, it is hard to take it for granted that leaders behave ethically. Our exploratory analysis shows that most leaders choose self-reporting for earnings manipulation, and they punish workers who rather choose automatic reporting, especially when the group payoff is low. Instead, leaders who choose automatic reporting refrain from punishing workers who rather choose self-reporting: they seem willing to take advantage of workers' fraudulent behavior to gain profits while keeping their hands clean. To our knowledge, this relationship has not been revealed before, although it fits with findings from other settings in which ethical leaders willingly keep their hands clean while maximizing profits through ethical free-riding, convenient leniency, and anti-social punishment.

Our results also add to the growing discussions in the business ethics literature about leaders' ethical dilemmas in their reporting decisions. The predominant motivating factor for leaders in our lab experiment is profit maximization, even through unethical acts. Instead, they do not seem to feel particularly responsible to set "the right example" through adhering to ethical rules that would imply lower private or corporate wealth.

Essentially, our findings reveal a dual role of leaders in shaping ethical behaviors within organizations: ethical leaders can stimulate workers' ethical behaviors, but most of the time leaders do not behave ethically in the first place. In this case, leading by example can backfire, with unethical leaders even punishing ethical workers for their truthfully reporting financial outcomes. This suggests the importance for organizations to appoint leaders with a clear inclination for ethical reporting or disclosure choices. A few cases can show that the business world is moving in that direction. An example comes from Statoil, a Norwegian energy company (renamed as Equinor): after a bribery charge in 2004, the new CEO at that time, Helge Lund, decided that the company would become one of the first firms to publicly disclose its payments to foreign governments to gain access to their natural resources. This gave employees a strong signal of a clear commitment to transparency.

Finally, we discuss whether the effects of leadership extend to changes in workers' view of how appropriate is to choose a reporting system not aligned with the leader's one, and inflate the outcome of the die roll. We find no significant differences in workers' mean responses across treatments. This suggests that leaders can influence workers' behavior through voluntary decisions and incentive power, but do not shape their norms and values. That said, we shall acknowledge that the null result might be due to the limited number of observations, and to the fact that the incentives were to match the choice provided by a randomly selected participant in the session, rather than in one's group. This calls for more research about the effect of leadership on social norms within organizations.

Limitations and Future Research

Our study is not without limitations, which provide fruitful avenues for future research. To start with, as with any lab experiment, external validity concerns may arise. One might question the role of the leaders in our experiment. In real settings, leadership is long-lasting, interactions between leaders and followers often occur face to face, and leaders can leverage many mechanisms to influence workers, including firing and hindering or promoting career progressions. We find robust important leadership effects even though the interactions between leaders and followers occur anonymously and only virtually in a short-time frame, and leaders have relatively soft powers. Thus, our results may represent a lower bound for the effects that prevail in real organizations. Another concern is that self-reporting methods and cheating may produce negative externalities. In our setting, choosing self-reporting and misreporting the outcome create individual benefits without affecting other subjects. Since the effects of ethical behaviors are likely to be magnified in the presence of negative externalities, our findings are likely to be even more important in real environments where negative externalities are present.

This research is a first attempt to explore the influence of leaders on workers' fraudulent behaviors through reporting choices. Inevitably, several aspects have been omitted. For example, providing leaders with the possibility to assign punishments or rewards based not only on workers' reporting choices but also on their reported die-rolling outcomes would help to rule out the possibility that leaders with better cognitive skills were also better able to infer workers' reported outcomes from group performance.

While our attention has been devoted to reporting choices and the leader effect, other aspects of our main findings are worth discussing here as open questions for future research. For instance, our data reveal a self-reporting rate of around 80%, which is higher than the cheating rate in standard die-rolling experiments. Perhaps subjects do not have any moral qualms about self-reporting at all, or they view it as less distasteful compared with automatic reporting since dishonesty does not harm anyone other than the experimenter here. Other potential explanations may include the desire to signal honesty by truthfully self-reporting a die-rolling outcome, distrust toward a computer randomization device, or the mere pleasure gained from the act of rolling dice. While the current design was not meant to capture individual perceptions toward self-reporting vs third-party reporting methods, it can be extended in this direction.