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We examine the interactive effect of justification and ambiguity on the tendency to distort operating decisions in an incentivized experiment. Managers decide whether to drop or keep a project on behalf of the owners. Although dropping the project always leads to higher payoffs for managers, keeping the project leads to higher payoffs to the owners for projects with good future outcomes. Dropping a project with good future prospects is akin to real earnings management (REM), such as cutting R&D to meet bonus targets. We find that justification increases REM when project outcomes are ambiguous but has no effect when the distribution of project outcomes is known. Ambiguity gives flexibility for managers to craft a plausible justification for dropping the project that appears accountable to the owners. The opportunity for impression management makes selfish actions more attractive to managers because it helps to promote a positive social image. [ABSTRACT FROM AUTHOR]

Our study uses an experimental method to provide insight into the flow of information across two asset markets that are fully segmented. In our asset markets, two separate sets of participants trade an identical asset in different markets. We then introduce a shock to fundamentals in one market to examine the response of traders in the second market. Because there is no fundamental shock in the second market, we can separate information‐based reactions from responses due to changes in underlying fundamental values. With the separation across markets, we observe whether information relating to a fundamental shock that only affects the shocked market is transmitted to the non‐shocked market. Our evidence suggests that traders in one market are observing behavior in the other contemporaneous market. After an information shock, price efficiency declines but improves by the end of trading. [ABSTRACT FROM AUTHOR]