deeganfat3e ppt ch11-ed
TRANSCRIPT
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11-1Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Financial Accounting TheoryCraig Deegan
Chapter 11
Reactions of individuals to financial reporting:
an examination of behavioural research
Slides written by Craig Deegan
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8/11/2019 DeeganFAT3e PPT Ch11-Ed
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11-2Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Learning objectives
In this chapter you will be introduced to: how behavioural research differs from capital market
research
how different accounting-related variables can be
manipulated in behavioural research
how the results of behavioural research can be ofrelevance to corporations and the accounting profession
for anticipating individual reactions to accounting
disclosures
how the results of behavioural research can form the
basis for developing ways to more efficiently useaccounting-related data
the limitations of behavioural research
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11-4Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Brunswick Lens Model
Used to explain behavioural research
Perspectives about the environment are generated
(observed) through a lens of imperfect cues
Statistical modelling is applied to determine the
weighting (importance) of the various cues
(independent variables) to the criterion event of
success (dependent variable)
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11-5Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Brunswick Lens Model (cont.)
Right-hand side models how the individual usescues to make an ultimate decision about the issue
under investigation
Left-hand side models the relationship betweenthe actual phenomenon or event and the particular
cues provided
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11-6Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Applicability of the Lens Model
Structure of the Lens Model can be applied toalmost any decision-making scheme
e.g. lending decision
explicitly considers inputs (use of cues), the decision
process and outputs (ultimate decisions)
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11-7Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Types of issues to be considered
At input level scaling characteristics of individual cues methods of presentation
context
At the level of processing the information characteristics of the person making the judgement
characteristics of the decision rule
At the output or decision level qualities of the judgement
self-insight
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11-8Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Input leveluse of cues
How and whether particular cues are used indecision making is particularly relevant to the
accounting profession
If information items in financial statements are notused, then they could be deemed immaterial and
therefore not requiring disclosure
The accounting profession is also interested inwhether presentation (in financial statement or in a
footnote) impacts decision
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11-9Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Research evidencethe use ofinformation items
In making predictions of financial returns, analystsare found to acquire earnings and sales
information more often than other types (Pankoff &
Virgil 1970; Mear & Firth 1987)
Studies questioned the provision of current cost
information, subjects relied more on historical cost
information (Heintz 1973; McIntyre 1973)
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11-10Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Research evidencethe presentationof information
Different presentation formats found to influenceusers decisions
including bar charts, line graphs, pie charts and tables
Moriarity (1979) found students and accountantsusing Chernoff faces were able to outperform
those using ratios in predicting bankruptcy and
models of bankruptcy
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11-11Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Research evidencethe presentationof information (cont.)
Studies examining decision making by loanofficers, based on whether information is
incorporated within the financial statements or
included as footnotes, found presentation made no
difference (Wilkins & Zimmer 1983)
Provision of segment information reduced
subjects reliance on past share prices (Stallman
1969; Doupnik & Rolfe 1989)
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11-12Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Decision-making process
Studies have examined how the various cues areweighted
Judgements have been found to be consistent
over time
Decision makers also have been found to employsimplifying heuristics when making a decision
A heuristic can be defined as a simplifying rule of thumb
Simplifying rules may be employed which take a lot less
time but nevertheless generate acceptable predictions or
solutions It is useful to know about the use of heuristicsparticular
by successful judges/decision-makers
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Decision-making heuristics
Three main simplifying heuristics have beenidentified
representativeness
anchoring and adjustment
availability
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Decision-making heuristicsrepresentativeness
Decision makers often assess the likelihood ofitems belonging to a category by considering how
similar the item is to the typical member of the
category
An implication is that the subjects typically ignore
the base rate of the population in question
may overstate the number of cases in a particular
category
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Decision making heuristicsanchoring and adjustment
Individuals make an initial judgement or estimateand then only partial adjust their view as a result of
additional information
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11-16Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Decision making heuristicsavailability
Relates to whether recollections of relatedoccurrence or events can easily come to mind
The actual base rates of occurrence of an event
are ignored
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11-17Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Knowledge of heuristics in research
Useful to know of heuristics in use if the heuristic results in inappropriate decisions being
made, the tendency can be highlighted and action
taken
the use of a heuristic by experts could be efficient
relative to costly data-gathering and processing novices could then be advised to use the rule of thumb
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Decision outputdecision accuracy
Research has considered how accurate thepredictions are relative to the actual environmental
outcomes
loan officers found to predict bankruptcy fairly regularly
(Libby 1975)
bankers and accounting students also found to correctlypredict bankruptcies (Zimmer 1980)
decision makers working in a team can outperform
individual decision makers
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2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Protocol analysis
This form of behavioural research requiressubjects to verbalise their thought processes while
making decisions or judgements
common in auditing research
Understanding how judgements are made is
important in improving those judgements
Useful in examining information search
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Th l f diff
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2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
The relevance of differencesin culture
We considered the issue of culture in Chapter 4 and
we learned that some cultures are considered to bemore secretive than others; some cultures seek greateruncertainty avoidance than others; and so forth
Differences at a national level were then related backto the international differences in accounting practices
that existed prior to the International adoption of IFRS Culture has also been suggested as a factor in
influencing organisational structures, legal systems andso forth
It is reasonable to argue that an individuals use ofparticular cues (information items) will in part bedependent upon the cultural background of theindividual
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2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
The relevance of differencesin culture (cont.)
Studies that investigate decision-makingprocesses in particular countries will perhaps notbe generalisable to other countriesparticularly ifthe respective countries have significantly differentcultural attributes
Determining the validity of a particular decision-making model across different cultures would bean important area for future accounting research
At this point in time there is very little behaviouralaccounting research which explores how the
usage of cues in particular decisions is affected byspecific cultural attributes
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2009 McGraw-Hill Australia Pty LtdPPTs t/a Deegan, Financial Accounting Theory 3e
Limitations of behavioural research
Research examining similar issues has generatedconflicting results
difficult to determine causes of inconsistencies
Settings of studies often different to real-world
settings
implications for generalisability
Very difficult to replicate cues available in the
workplace
Students often used as surrogates
Small number of subjects often used