We examine the future sales implications of product quality measures for 11 plants of a manufacturing group in a Fortune 500 firm. Our results indicate that both financial quality measures, such as external failure costs incurred due to product failures at customer sites, and nonfinancial quality measures, such as defect rates and on-time deliveries, are leading indicators of future sales. While changes in defects and on-time deliveries affect sales in the subsequent quarter, changes in external failure costs are negatively associated with sales two and three quarters hence. Corroborating popular claims about the importance of external failure costs, we find that a $1 increase in external failure costs is associated with a cumulative sales decrease of $26, or approximately $10.40 in lost profits.

This study reports the results of three experiments that examine how preferences for wealth and honesty affect managerial reporting. We find that subjects often sacrifice wealth to make honest or partially honest reports, and they generally do not lie more as the payoff to lying increases. We also find less honesty under a contract that provides a smaller share of the total surplus to the manager than under one that provides a larger share, suggesting that the extent of honesty may depend on how the surplus is divided between the manager and the firm. The optimal agency contract yields more firm profit than a contract that relies exclusively on honest reporting. However, a modified version of the optimal agency contract, which makes use of subjects' preferences for honest reporting, yields the highest firm profit. These results suggest that firms may be able to design more profitable employment contracts than those identified by conventional economic analysis.