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Abstract:
We investigate a key assumption underlying much of the experimental research in financial accounting that graduate business students are a reasonable proxy for nonprofessional investors. We investigate this assumption using two settings: (a) an experimental setting from a recent paper that relies on this assumption, and (b) by using a proprietary dataset from a publicly traded company's investor relations website. Our analysis reveals that, on average, early MBA students (i.e., students beginning the "core" MBA classes) acquire information as well as nonprofessional investors but that they are unable to integrate that information with other information when making investment-related judgments and decisions. In contrast, select MBA students (i.e., students who have completed the core and elected to take a financial analysis course) acquire and integrate information as well as nonprofessional investors when making investment-related judgments and decisions. Further tests reveal that early MBA students with significant work experience (e.g., greater than five years) perform better than less experienced, early MBA students and not significantly different from nonprofessional investors. Our results suggest that using graduate business students as a proxy for nonprofessional investors is a valid methodological choice, provided researchers give careful consideration to aligning their tasks with the appropriate level of education and/or work experience.

Investor sophistication, behavioral research in accounting, stock options

Abstract:
This study considers a setting in which a manager has incentives to manipulate reported performance and asks a subordinate employee to provide a biased accounting estimate to support the desired result. The subordinate has the opportunity to constrain manager opportunism via the degree of compliance with the request. The nature of the manager-subordinate relationship is likely a key determinant of whether the subordinate complies with the manager's requests. We draw upon the leader member exchange literature to define and measure relationship quality. We propose that those subordinates in higher quality relationships (i.e. closer to and more aligned with the manager) will provide more biased information when requested to do so. We further propose that the link between relationship quality and bias will differ, depending upon the type of bias that is requested. Results from an experiment show that high quality relationship subordinates introduce greater bias in estimates and that the mechanism behind the bias decision is different for income increasing and income decreasing requests. The general acceptance of conservative accounting allows for relationship quality to have a greater effect when an income-decreasing estimate is requested. Perceptions of the ethics in providing accounting estimates also come into play. Participants who believed that providing accounting estimates is a relatively ethical task were less likely to provide biased estimates, particularly when the manager's request was for income-increasing estimates. These findings provide an understanding of the determinants of subordinates' decisions to constrain manager opportunism in performance reporting. Further, counter to the existing management literature, our result show potential negative consequences of high-quality relationships between subordinates and managers.

independence, reporting bias, control

Abstract:
We investigate a key assumption underlying much of the experimental research in financial accounting that graduate business students are a good proxy for non-professional investors. To conduct our investigation, we categorize recent experimental studies in financial accounting based on the relative level of integrative complexity inherent in each study's task. We then conduct experiments using two tasks, one that is relatively low in integrative complexity and one that is relatively high in integrative complexity, and compare the responses of two groups of MBA students and non-professional investors.

Our results suggest that using MBA students as a proxy for non-professional investors is a valid methodological choice, provided researchers give careful consideration to aligning a task's integrative complexity with the appropriate level of MBA student. MBA students who have completed their core MBA courses and are enrolled in or have completed a financial statement analysis course are a good proxy for non-professional investors in tasks that are relatively low in integrative complexity. Though less definitive, the majority of our tests also suggest that these students are a good proxy for non-professional investors in tasks that are relatively high in integrative complexity. However, care must be taken when using students in the first-year core financial accounting course. In tasks that are relatively low in integrative complexity, these students perform similarly to non-professional investors except when they are asked to make an investment decision. In tasks that are relatively high in integrative complexity, these students acquire information similarly to non-professional investors, but they do not appear to integrate the information in a similar manner.

sophistication, behavioral research in accounting, stock options

Abstract:
We investigate a key assumption underlying much of the experimental research in financial accounting that graduate business students are a good proxy for non-professional investors. To conduct our investigation, we categorize recent experimental studies in financial accounting based on the relative level of integrative complexity inherent in each study's task. We then conduct experiments using two tasks, one that is relatively low in integrative complexity and one that is relatively high in integrative complexity, and compare the responses of two groups of MBA students and non-professional investors.

Our results suggest that using MBA students as a proxy for non-professional investors is a valid methodological choice, provided researchers give careful consideration to aligning a task's integrative complexity with the appropriate level of MBA student. MBA students who have completed their core MBA courses and are enrolled in or have completed a financial statement analysis course are a good proxy for non-professional investors in tasks that are relatively low in integrative complexity. Though less definitive, the majority of our tests also suggest that these students are a good proxy for non-professional investors in tasks that are relatively high in integrative complexity. However, care must be taken when using students in the first-year core financial accounting course. In tasks that are relatively low in integrative complexity, these students perform similarly to non-professional investors except when they are asked to make an investment decision. In tasks that are relatively high in integrative complexity, these students acquire information similarly to non-professional investors, but they do not appear to integrate the information in a similar manner.

sophistication, behavioral research in accounting, stock options

Abstract:
XBRL (Extensible Business Reporting Language) is an emerging technology that facilitates directed searches and simultaneous presentation of related financial statement and footnote information. We investigate whether using an XBRL-enhanced search engine helps nonprofessional financial statement users acquire and integrate related financial information when making an investment decision. We conduct our investigation in the context of recognition versus disclosure of stock option compensation. Our results reveal that many users do not access the technology, but those that do use it are better able to acquire and integrate information. Specifically, we find that when stock option accounting varies between firms, the use of an XBRL-enhanced search engine increases the likelihood that individuals acquire information about stock option compensation disclosed in the footnotes. We also find that XBRL helps individuals integrate the implications of this information, resulting in different investment decisions between individuals who use and do not use the search engine. Our results suggest that search-facilitating technologies, such as XBRL, aid financial statement users by improving the transparency of firms' financial statement information and managers' choices for reporting that information. Our results also reveal that wide publicity about the benefits of using search-facilitating technology may be needed to induce financial statement users to access the technology.

Abstract:
XBRL (Extensible Business Reporting Language) is an emerging technology that facilitates directed searches and simultaneous presentation of related financial statement and footnote information. We investigate whether using an XBRL-enhanced search engine helps nonprofessional financial statement users acquire and integrate related financial information when making an investment decision. We conduct our investigation in the context of recognition versus disclosure of stock option compensation. Our results reveal that many users do not access the technology, but those that do use it are better able to acquire and integrate information. Specifically, we find that when stock option accounting varies between firms, the use of an XBRL-enhanced search engine increases the likelihood that individuals acquire information about stock option compensation disclosed in the footnotes. We also find that XBRL helps individuals integrate the implications of this information, resulting in different investment decisions between individuals who use and do not use the search engine. Our results suggest that search-facilitating technologies, such as XBRL, aid financial statement users by improving the transparency of firms' financial statement information and managers' choices for reporting that information. Our results also reveal that wide publicity about the benefits of using search-facilitating technology may be needed to induce financial statement users to access the technology.

recognition, disclosure, transparency, XBRL

Abstract:
Previous research demonstrates that auditors' directional goals influence their reporting decisions. For example, when auditors have goals of accepting client-preferred accounting methods, they tend to exploit ambiguity in reporting standards to justify those methods, even when they are aggressive (Hackenbrack and Nelson 1996). We report an experimental investigation of the likely effectiveness of regulation designed to curb this tendency. Specifically, regulators suggest that having auditors identify benchmarks or assess the quality of various methods will "raise the bar" for method acceptability, thereby reducing auditor acceptance of aggressive reporting methods. However, this reasoning ignores the fact that ambiguity typically surrounds quality assessment. Following motivated reasoning theory, we argue that, in order to meet the increased standard for acceptability, auditors with high commitment to directional goals will exploit the ambiguity surrounding the quality of various methods when making quality assessments, with the result that the client-preferred method will be deemed best, or at least of high enough relative quality to be used. This theory suggests that auditor acceptance will increase with goal commitment, and that the increase will be most dramatic when quality assessment is performed. Results of our experiment support our hypotheses that performing a quality assessment amplifies the effects of auditors' directional goals on their acceptance of a client-preferred method and on their ratings of the quality of that method. Moreover, auditors making quality assessments are more likely to identify the client's method as the most appropriate method when they are more committed to their directional goals. An implication of our theory and results is that regulation (such as SAS No. 90) that requires auditors to make quality assessments may decrease auditors' objectivity when auditors have directional goals to accept client methods.

objectivity, motivated reasoning, financial reporting, earnings quality

Abstract:
Research suggests that investors and creditors react less strongly to information disclosed in footnotes than to information recognized on the face of financial statements, due at least in part to cognitive processing limitations. Emerging technologies (e.g., XBRL) that facilitate directed searches and simultaneous presentation of related financial statement and footnote information could potentially alleviate these limitations. We use an experiment to investigate whether the use of a search-facilitating technology affects how individuals react to recognition versus disclosure of stock option compensation. We find that the use of search-facilitating technology reduces differences in nonprofessional investors' financial performance judgments and investment decisions created by recognition versus disclosure. Additionally, we provide evidence that investors perceive greater differences in financial statement reliability between recognition and disclosure when they use search-facilitating technology. Overall, our findings suggest that search-facilitating technology improves the transparency of financial statement information and therefore may reduce incentives for firms to lobby for or to choose footnote disclosure to minimize the effects of negative information.

recognition, disclosure, transparency, XBRL

Abstract:
We examine how accurately auditors assess their own technical knowledge, and that of their subordinates. The accuracy of these assessments likely affects audit planning, task assignment, and promotion decisions. We find auditors are overconfident in their own and in their subordinates' knowledge and that optimism in subordinates' knowledge increases as the knowledge-gap between supervisors and subordinates increases. This optimism stems primarily from supervisors' reliance on their own knowledge to assess subordinates' knowledge and secondarily from insufficient adjustments for the knowledge-gap between them and their subordinates. Thus, if supervisors better assessed their own knowledge, assessments of subordinates' knowledge likely would improve.