1989 in addition research has shown that certain

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Unformatted text preview: d and third based on the ‘‘cheap talk’’ and self-serving bias literatures. The Nash model predicts that puffery should not affect audit levels differentially in the NP and YP settings because auditors understand managers’ incentives to use puffery opportunistically. Thus, auditors are predicted to select the Nash audit equally in the NP and YP settings. The cheap talk literature has shown that nonbinding communication can enhance mutual cooperation in coordination games where both parties benefit from cooperation (Cooper et al. 1989). In addition, research has shown that certain types of cheap talk can enhance cooperation in a Prisoners’ Dilemma game where players have symmetric payoffs and both can communicate an intent to punish a defector. Based on these findings, puffery in my setting may induce auditors to perceive their managers as trustworthy. This, in turn, will induce auditors to select the trust audit. The self-serving bias (SSB) prediction is that auditors’ trust is not reciprocated by managers, who use puffery opportunistically. The Pareto Opti...
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