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

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