Can Investors Adjust for Managerial Bias?

43 Pages Posted: 13 Jun 2019 Last revised: 20 Aug 2020

See all articles by James Smith

James Smith

University of Lethbridge - Dhillon School of Business

Lisa Koonce

University of Texas

Date Written: August 19, 2020


Financial information from firms often contains biased information. A common assumption
in the accounting literature is that if investors are aware of biases, they will be able to adjust for
those known biases. Drawing on insights from several areas in psychology and accounting, we
posit and experimentally test the idea that investors will be best able to adjust for known biases
in management’s earnings forecasts when the information about bias is in quantitative, EPS form
and the investor’s judgment is compatible with that bias information (also in quantitative, EPS
form). Results from three experiments suggest that quantification and compatibility are
beneficial for unraveling managerial bias, but not all investors unravel even under these
conditions. We also show that this result is robust to several moderator variables that capture
factors that are commonly found in the management earnings forecast setting. Our study has
implications for researchers, firm managers, regulators, and investors.

Keywords: Forecasts, Bias, Unraveling

JEL Classification: M41

Suggested Citation

Smith, James and Koonce, Lisa L., Can Investors Adjust for Managerial Bias? (August 19, 2020). Available at SSRN: or

James Smith

University of Lethbridge - Dhillon School of Business ( email )

4401 University Drive
Lethbridge, Alberta T1K 3M4
403-317-4053 (Phone)


Lisa L. Koonce (Contact Author)

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

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