Directional Preferences, Information Processing, and Investors' Forecasts of Earnings

Journal of Accounting Research, Vol. 45, No. 3, pp. 607-628, June 2007

22 Pages Posted: 11 Dec 2007

See all articles by Jeffrey Hales

Jeffrey Hales

University of Texas at Austin - Department of Accounting

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Abstract

This paper investigates the effects of preferences on judgments in an investing context, where investors should be motivated to interpret information objectively, yet have clear preferences with respect to what the information they are evaluating conveys (i.e., a gain or a loss on their investment). The results of the experiment are consistent with theories of motivated reasoning that predict when and in what manner directional preferences affect how information is processed. Specifically, investors are motivated to agree unthinkingly with information that suggests they might make money on their investment, but disagree with information that suggests they might lose money. In disagreeing, long investors expect earnings to be relatively high and short investors expect earnings to be relatively low. These results have implications not only for understanding investor behavior, but also for understanding the biased behavior of market participants who face conflicts of interest, such as analysts, managers, and auditors, by providing direct evidence that such behavior can arise for purely psychological reasons.

Suggested Citation

Hales, Jeffrey, Directional Preferences, Information Processing, and Investors' Forecasts of Earnings. Journal of Accounting Research, Vol. 45, No. 3, pp. 607-628, June 2007, Available at SSRN: https://ssrn.com/abstract=1065880 or http://dx.doi.org/10.1111/j.1475-679X.2007.00247.x

Jeffrey Hales (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

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United States
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