Financial Accounting Theory Craig Deegan Chapter 11

7/22/2019 Financial Accounting Theory Craig Deegan Chapter 11

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Copyright 2006 McGraw-Hill Australia Pty Ltd

PPTs t/a Financia l Account ing Theory 2e by Deegan 11-1

Financial Accounting TheoryCraig Deegan

Chapter 11

Reactions of individuals to financial reporting:

an examination of behavioural research

Slides written by Craig Deegan and Michaela

Rankin


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PPTs t/a Financia l Account ing Theory 2e by Deegan

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


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Learning objectives (cont.)

how the results of behavioural research can form thebasis for developing ways to more efficiently use

accounting-related data

the limitations of behavioural research


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Introduction to behavioural research

Behavioural research examines how individualsreact to various accounting disclosures

Grounded in behavioural decision theory

Goal is to describe actual decision behaviour,

evaluate its quality and develop and testhypotheses of the underlying psychological

processes


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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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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 between

the actual phenomenon or event and the particular

cues provided


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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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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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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 not

used, then they could be deemed not material and

therefore not requiring disclosure

The accounting profession is also interested in

whether presentation (in financial statement or in a

footnote) impacts decision


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Research evidencethe use of

information 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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Research evidencethe presentation of

information

Different presentation formats found to influenceusers decisions

including bar charts, line graphs, pie charts and tables

Moriarity (1979) found students and accountants

using Chernoff faces were able to outperform

those using ratios in predicting bankruptcy, and

models of bankruptcy


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Research evidencethe presentation of

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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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


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Decision-making heuristics

Three main simplifying heuristics have beenidentified

representativeness

anchoring and adjustment

availability


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Decision-making heuristics

representativeness

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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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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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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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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Protocol analysis (cont.)

Disadvantages include the process of verbalising can have an effect on the

decision process

a considerable portion of the information utilised may not

be verbalised

subjects may provide verbalisations which are parallel butare independent of the actual thought process

criticisms of the coding methods


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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

Financial Accounting Theory Craig Deegan Chapter 11

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