copyright © 2000 mcgraw-hill book co. aust. ppt t/a financial accounting theory by deegan11.1...
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Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.1
Financial Accounting TheoryFinancial Accounting TheoryCraig DeeganCraig Deegan
Chapter 11Chapter 11
Reactions of individuals to financial Reactions of individuals to financial reporting: An examination of reporting: An examination of
behavioural researchbehavioural research Slides written by Michaela RankinSlides written by Michaela Rankin
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.2
Learning ObjectivesLearning Objectives
• In this chapter you will be introduced to In this chapter you will be introduced to – how behavioural research differs from capital how behavioural research differs from capital
market researchmarket research
– how different accounting-related variables can how different accounting-related variables can be manipulated in behavioural researchbe manipulated in behavioural research
– how the results of behavioural research can be how the results of behavioural research can be of relevance to corporations and the accounting of relevance to corporations and the accounting profession for profession for anticipatinganticipating individual reactions individual reactions to accounting disclosuresto accounting disclosures
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.3
Learning ObjectivesLearning Objectives
– How the results of behavioural research can form How the results of behavioural research can form the basis for developing ways to more efficiently the basis for developing ways to more efficiently use accounting-related datause accounting-related data
– the limitations of behavioural researchthe limitations of behavioural research
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.4
Introduction to behavioural Introduction to behavioural researchresearch
• Behavioural research examines how Behavioural research examines how individuals react to various accounting individuals react to various accounting disclosuresdisclosures
• grounded in behavioural decision theorygrounded in behavioural decision theory
• goal is to describe actual decision goal is to describe actual decision behaviour, evaluate its quality and develop behaviour, evaluate its quality and develop and test hypotheses of the underlying and test hypotheses of the underlying psychological processespsychological processes
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.5
Brunswick Lens ModelBrunswick Lens Model
• Used to explain behavioural researchUsed to explain behavioural research
• perspectives about the environment are perspectives about the environment are generated (observed) through a ‘lens’ of generated (observed) through a ‘lens’ of imperfect cuesimperfect cues
• to determine the weighting (importance) of to determine the weighting (importance) of the various cues (independent variables) to the various cues (independent variables) to the criterion event of success (dependent the criterion event of success (dependent variable) statistical modelling is applied variable) statistical modelling is applied
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.6
Brunswick Lens Model— Brunswick Lens Model— continuedcontinued
• right-hand side models how the individual right-hand side models how the individual uses cues to make an ultimate decision uses cues to make an ultimate decision about the issue under investigationabout the issue under investigation
• left-hand side models the relationship left-hand side models the relationship between the actual phenomenon or event between the actual phenomenon or event and the particular cues providedand the particular cues provided
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.7
Applicability of the Lens ModelApplicability of the Lens Model
• Structure can be applied to almost any Structure can be applied to almost any decision-making schemedecision-making scheme– eg. lending decisioneg. lending decision– explicitly considers inputs (use of cues), the explicitly considers inputs (use of cues), the
decision process and outputs (ultimate decision process and outputs (ultimate decisions)decisions)
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.8
Types of issues to be consideredTypes of issues to be considered
• At input level:At input level:– scaling characteristics of individual cuesscaling characteristics of individual cues– methods of presentationmethods of presentation– contextcontext
• At the level of processing the information:At the level of processing the information:– characteristics of the person making the characteristics of the person making the
judgementjudgement– characteristics of the decision rulecharacteristics of the decision rule
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.9
Types of issues to Types of issues to be considered—continuedbe considered—continued
• At the output or decision level:At the output or decision level:– qualities of the judgementqualities of the judgement– self-insightself-insight
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.10
Input level—use of cuesInput level—use of cues
• How and whether particular cues are used How and whether particular cues are used in decision-making is particularly relevant in decision-making is particularly relevant to the accounting professionto the accounting profession
• if information items in financial statements if information items in financial statements are not used, then they could be deemed not are not used, then they could be deemed not material and therefore not requiring material and therefore not requiring disclosuredisclosure
• the accounting profession is also interested the accounting profession is also interested in whether presentation (in financial in whether presentation (in financial statement, or in a footnote) impacts decision statement, or in a footnote) impacts decision
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.11
Research evidence—the Research evidence—the use of information items use of information items
• In making predictions of financial returns, In making predictions of financial returns, analysts are found to acquire earnings and analysts are found to acquire earnings and sales information more often than other sales information more often than other types (Pankoff and Virgil 1970; Mear and types (Pankoff and Virgil 1970; Mear and Firth 1987)Firth 1987)
• studies questioned the provision of current studies questioned the provision of current cost information, subjects relied more on cost information, subjects relied more on historical cost information (Heintz 1973; historical cost information (Heintz 1973; McIntyre 1973)McIntyre 1973)
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.12
Research evidence—the Research evidence—the presentation of informationpresentation of information
• Different presentation formats found to Different presentation formats found to influence users’ decisionsinfluence users’ decisions– including bar charts, line graphs, pie charts and including bar charts, line graphs, pie charts and
tablestables
• Moriarity (1979) found students and Moriarity (1979) found students and accountants using Chernoff faces were able accountants using Chernoff faces were able to outperform those using ratios in to outperform those using ratios in predicting bankruptcy, and models of predicting bankruptcy, and models of bankruptcybankruptcy
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.13
Research evidenceResearch evidence——the the presentation of information cont’dpresentation of information cont’d
• Studies examining decision making by loan Studies examining decision making by loan officers based on whether information is officers based on whether information is incorporated within the financial statements incorporated within the financial statements or included as footnotes found presentation or included as footnotes found presentation made no difference (Wilkins and Zimmer made no difference (Wilkins and Zimmer 1983)1983)
• provision of segment information reduced provision of segment information reduced subjects’ reliance on past share prices subjects’ reliance on past share prices (Stallman 1969; Doupnik and Rolfe 1989) (Stallman 1969; Doupnik and Rolfe 1989)
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.14
Decision-making processDecision-making process
• Studies have examined how the various Studies have examined how the various cues are weightedcues are weighted
• judgements have been found to be judgements have been found to be consistent over time consistent over time
• decision-makers also have been found to decision-makers also have been found to employ simplifying heuristics when making employ simplifying heuristics when making a decision a decision
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.15
Decision-making heuristicsDecision-making heuristics
• Three main simplifying heuristics have Three main simplifying heuristics have been identified:been identified:– representativenessrepresentativeness– anchoring and adjustmentanchoring and adjustment– availabilityavailability
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.16
Decision-making heuristics— Decision-making heuristics— representativenessrepresentativeness
• Decision makers often assess the likelihood Decision makers often assess the likelihood of items belonging to a category by of items belonging to a category by considering how similar the item is to the considering how similar the item is to the typical member of the categorytypical member of the category
• an implication is that the subjects typically an implication is that the subjects typically ignore the base rate of the population in ignore the base rate of the population in questionquestion– may overstate the number of cases in a may overstate the number of cases in a
particular categoryparticular category
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.17
Decision making heuristics— Decision making heuristics— anchoring and adjustmentanchoring and adjustment
• Individuals make an initial judgement or Individuals make an initial judgement or estimate and then only partial adjust their estimate and then only partial adjust their view as a result of additional information view as a result of additional information
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.18
Decision making heuristics— Decision making heuristics— availabilityavailability
• Relates to whether recollections of related Relates to whether recollections of related occurrence or events can easily come to occurrence or events can easily come to mindmind
• the actual base rates of occurrence of an the actual base rates of occurrence of an event are ignoredevent are ignored
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.19
Knowledge of heuristics in Knowledge of heuristics in researchresearch
• Useful to know of heuristics in use:Useful to know of heuristics in use:– if the heuristic results in inappropriate decisions if the heuristic results in inappropriate decisions
being made, the tendency can be highlighted being made, the tendency can be highlighted and action takenand action taken
– the use of a heuristic by experts could be the use of a heuristic by experts could be efficient relative to costly data-gathering and efficient relative to costly data-gathering and processingprocessing
• novices could then be advised to use the rule of novices could then be advised to use the rule of thumb thumb
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.20
Decision output—decision Decision output—decision accuracyaccuracy
• Research has considered how accurate the Research has considered how accurate the predictions are relative to the actual predictions are relative to the actual environmental outcomesenvironmental outcomes– loan officers found to predict bankruptcy fairly loan officers found to predict bankruptcy fairly
regularly (Libby 1975)regularly (Libby 1975)– bankers and accounting students also found to bankers and accounting students also found to
correctly predict bankruptcies (Zimmer 1980)correctly predict bankruptcies (Zimmer 1980)– decision-makers working in a team can decision-makers working in a team can
outperform individual decision-makers outperform individual decision-makers
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.21
Protocol analysisProtocol analysis
• This form of behavioural research requires This form of behavioural research requires subjects to verbalise their thought processes subjects to verbalise their thought processes while making decisions or judgementswhile making decisions or judgements– common in auditing researchcommon in auditing research
• understanding how judgements are made is understanding how judgements are made is important in improving those judgementsimportant in improving those judgements
• useful in examining information searchuseful in examining information search
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.22
Protocol analysis—continuedProtocol analysis—continued
• Disadvantages include:Disadvantages include:– the process of verbalising can have an effect on the process of verbalising can have an effect on
the decision processthe decision process– a considerable portion of the information utilised a considerable portion of the information utilised
may not be verbalisedmay not be verbalised– subjects may provide verbalisations which subjects may provide verbalisations which
parallel but are independent of the actual thought parallel but are independent of the actual thought processprocess
– criticisms of the coding methodscriticisms of the coding methods
Chapter 11: Behavioural research
Copyright © 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan 11.23
Limitations of behavioural Limitations of behavioural researchresearch
• Research examining similar issues has Research examining similar issues has generated conflicting resultsgenerated conflicting results– difficult to determine causes of inconsistenciesdifficult to determine causes of inconsistencies
• settings of studies often different to real-world settings of studies often different to real-world settingssettings– implications for generalisabilityimplications for generalisability
• very difficult to replicate cues available in the very difficult to replicate cues available in the workplaceworkplace
• students often used as surrogatesstudents often used as surrogates• small number of subjects often used small number of subjects often used