The Effect of Investor Status on Investors’ Susceptibility to Earnings Fixation

35 Pages Posted: 27 Jan 2013 Last revised: 5 Jun 2015

Ling L. Harris

University of South Carolina - School of Accounting

Jessen L. Hobson

University of Illinois at Urbana-Champaign

Kevin E. Jackson

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: May 2015

Abstract

This study investigates whether an investor’s status as a current or a prospective investor affects the investor’s susceptibility to earnings fixation and proposes a mechanism to reduce earnings fixation. Our experimental results suggest that current investors are more susceptible to earnings fixation than prospective investors, and that current investors can reduce earnings fixation by forecasting future earnings as part of their evaluation process. We also provide theory-consistent evidence that current investors’ prevention focus makes them elevate summary earnings in their evaluation of a company. However, when forecasting future earnings, current investors see summary earnings as one of several similarly important evaluation inputs rather than one substantially more important input (relative to its components). Our study contributes to research and practice by documenting that earnings fixation is influenced by investor status and by identifying a simple mechanism that current investors can use to reduce their susceptibility to earnings fixation.

Keywords: Earnings fixation, current investors, prospective investors

Suggested Citation

Harris, Ling L. and Hobson, Jessen L. and Jackson, Kevin E., The Effect of Investor Status on Investors’ Susceptibility to Earnings Fixation (May 2015). Available at SSRN: https://ssrn.com/abstract=2207173 or http://dx.doi.org/10.2139/ssrn.2207173

Ling Harris

University of South Carolina - School of Accounting ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

Jessen L. Hobson

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

Kevin Jackson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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