The Effect of Investor Status on Investors’ Susceptibility to Earnings Fixation
35 Pages Posted: 27 Jan 2013 Last revised: 5 Jun 2015
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Experimental Research in Financial Accounting
By Robert Libby, Robert J. Bloomfield, ...
-
Comprehensive Income Disclosures and Analysts' Valuation Judgments
By D. Eric Hirst and Patrick E. Hopkins
-
Fair Values, Comprehensive Income Reporting, and Bank Analysts' Risk and Valuation Judgments
By D. Eric Hirst, Patrick E. Hopkins, ...
-
Purchase, Pooling, and Equity Analysts' Valuation Judgments
By Patrick E. Hopkins, Richard W. Houston, ...
-
Directional Preferences, Information Processing, and Investors' Forecasts of Earnings
-
The 'Incomplete Revelation Hypothesis' and Financial Reporting
-
Using Psychology Theories in Archival Financial Accounting Research
By Lisa Koonce and Molly Mercer
-
Cheap Talk, Fraud and Adverse Selection in Financial Markets: Some Experimental Evidence
By Robert Forsythe, Russell J. Lundholm, ...