Intrinsic Benchmark Beating

Abstract

We examine the role of intrinsic motivations—psychologically based, non‐economic factors—in earnings benchmark beating by focusing on owner‐managed firms that are largely free from external pressures from shareholders, analysts, and the media. We observe benchmark beating as instances in which owner‐managers decrease their salaries to transform a loss into a profit. Two key results emerge. First, managers’ earnings benchmark beating correlates with their private, non‐economic benchmark beating, such as earning more than their spouses and marrying near base‐ten‐year ages. Second, even when accounting for various extrinsic motivations, such as reporting pressures from debt‐holders, employees, and suppliers, we find that benchmark beating remains highly prevalent when these motivations are negligible. Overall, our results suggest that reference‐dependent preferences from psychology literature complement economic arguments in explaining earnings benchmark beating.