11b reactions-of-individuals-to-financial-reporting-an-examination-of-behavioural-research

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



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



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



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



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



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)



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



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



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



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)



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



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)



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



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



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



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



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



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



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



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



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 a considerable portion of the information

utilised may not be verbalisedutilised may not be verbalised– subjects may provide verbalisations which subjects may provide verbalisations which

parallel but are independent of the actual parallel but are independent of the actual thought processthought process

– criticisms of the coding methodscriticisms of the coding methods



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-settings of studies often different to real-world settingsworld settings– implications for generalisabilityimplications for generalisability

• very difficult to replicate cues available in very difficult to replicate cues available in the workplacethe workplace

• students often used as surrogatesstudents often used as surrogates• small number of subjects often used small number of subjects often used

11b reactions-of-individuals-to-financial-reporting-an-examination-of-behavioural-research

Economy & Finance