Why smart managers tell stupid lies

A new study may explain why corporate managers, like those in the Enron scandal, lie about their companies’ earnings, even though it will hurt their own careers and the businesses they work for.

A limited capacity to see the whole picture—known as “bounded rationality"—combined with a faulty ethical compass are two big reasons, shows a new study from the University of Toronto.

The study, reported in the journal Accounting and Public and Policy, also finds that shareholders are just as guilty of the same weaknesses and that insider trading is linked to earnings manipulation.

"For a long time we’ve asked ourselves, ‘How come smart, rational people carry out short-term schemes that in the long-term undoubtedly are going to sink them?” says author Ramy Elitzur, associate professor of accounting.

Read more at University of Toronto