We conduct an experiment to examine investment professionals’ use of corporate social responsibil... more We conduct an experiment to examine investment professionals’ use of corporate social responsibility (CSR) disclosures when making personal investment decisions or investment recommendations to clients. We predict and find that investment professionals are more willing to personally invest and recommend investment to a client when a firm discloses positive CSR performance than when it makes no CSR disclosures. Investment professionals’ decisions and recommendations are influenced by CSR disclosures both because, on average, they believe that better CSR performance results in better current and longer-term financial performance and because they value the societal benefits of CSR activities. We also find that investment professionals’ general beliefs regarding whether CSR activities benefit society affect how they assess firms’ CSR performance and their view of the relation between CSR performance and financial performance. Finally, investment professionals’ experience appears to protect them from the potential biasing effect of appealing pictures that accompany many CSR disclosures.
Prediction is one of the most important aspects of investment decision making. This study provide... more Prediction is one of the most important aspects of investment decision making. This study provides evidence that investors' predictive earnings judgments can be systematically influenced as a consequence of the combined effects of "output interference" and "Uavailability," and that the use of financial accounting information in the prediction process seems to provide limited benefit in terms of reducing this effect. Output interference is a psychological concept that implies that whatever is thought about first interferes with, and thus inhibits, later thoughts about an issue. An availability-based prediction strategy is one in which the decision maker uses the relative number of pro versus con reasons generated, and/or the ease with which such reasons can be generated, as cues in judging the likelihood of future events. Fifty-eight investors participated in an experiment that demonstrated that the order in which they considered opposing arguments regarding the possibility of reaching a specified level of earnings had an impact on both their ability to generate supporting and opposing reasons and their subsequent probability judgment that earnings would actually reach the specified level. The outcome for which the investors were able to generate the most supporting reasons was judged more probable. Investors were able to think of more reasons supporting a particular outcome, not because there were more such reasons in the objective environment, but rather as a consequence of output interference. The systematic effect on judgment, although perhaps slightly reduced, persisted when investors had access to financial statements while considering the company's earnings prospects. C ONSIDERABLE evidence presented in the judgment and decision-making literature indicates that individuals use heuristic procedures that simplify cognitive processing [Kahneman et al., 1982; Nisbett and Ross, 1980; Slovic et al., 1977; and Tversky and Kahneman, 1974]. In particular, people appear to employ cognitive heuristics when assessing or predicting the likelihood of uncertain events. Although these heuristic procedures are often efficient in that they reduce the complexities of such tasks, an extensive line of research indiI thank the members of my dissertation committee at the University of Wisconsin for their contributions to this research and for their professional guidance in general. This paper has also benefited from the helpful comments of my colleagues at the University of Pittsburgh, two helpful reviewers, and the participants of a University of Michigan accounting workshop. The research assistance of Sangho Do and Bonnie Morris, and the financial support of the Ernst & Whinney Foundation are gratefully acknowledged. Donald V. Moser is at The Joseph M. Katz Graduate School of Business, University of Pittsburgh. Manuscript received January 1988. Revisions received May 1988 and December 1988. Accepted December 1988.
ABSTRACT: A series of participative budgeting experiments has examined the effect of incentive st... more ABSTRACT: A series of participative budgeting experiments has examined the effect of incentive structures and/or information environments on employees' reporting and production decisions. We analyze the previous experiments in terms of the insights they offer regarding agency theory. We expand the previous analyses of the incentive contracting experiments in three ways. First, we classify the earliest set of participative budgeting experiments based on the type of incentive and information structures examined in each study. Second, from the 21 papers we review, we identify eight specific cases for which the experimental evidence contradicts an agency theory prediction (i.e., anomalies). Third, we develop a classification scheme that can be used to organize hypotheses in terms of whether they rely on an agency theory prediction, a competing behavioral prediction, or a combination of the two. We use this classification to illustrate why we believe that studies that test both an agency theory prediction and a competing behavioral prediction are more likely to advance the development of theory than those that do not.
ABSTRACT Although large audit firms in the U.S. and the U.K. have begun offshoring audit work, th... more ABSTRACT Although large audit firms in the U.S. and the U.K. have begun offshoring audit work, there is limited research on this expanding practice. We use a combination of survey, interview and experimental methods to examine audit client management’s 1) perceptions of, and reactions to, audit offshoring, 2) beliefs regarding the effect of offshoring on audit quality, and 3) willingness to trade off audit quality for lower audit fees. Our survey and interview results indicate that most audit client managers are unaware of offshoring. When informed of it, they are concerned that it could negatively affect audit quality, data security, and their ability to communicate with overseas audit staff. Clients believe that audit firms should be required to disclose their offshoring practices to their clients. Clients who are more familiar with offshoring are less concerned about it. The results of our experiment show that clients who believe that offshoring will lower audit quality are nevertheless willing to trade off quality for a reduction in audit fees. Our findings have implications for audit firms, clients and regulators. Audit firms can use our results to anticipate clients’ reactions to offshoring and to reassess their disclosure policies. Clients can use our findings as a basis for discussions with their auditors regarding offshoring and its potential impact on the audit process. Finally, regulators should find our results useful in their deliberations regarding the need to regulate audit offshoring and related disclosures.
M ost companies try to project an image of corporate social responsibility (CSR), often by volunt... more M ost companies try to project an image of corporate social responsibility (CSR), often by voluntarily supplementing their annual financial reports with separate CSR reports. Because such CSR reports represent additional disclosures, accounting researchers have become increasingly interested in the role that such disclosures play in firm valuation. The fundamental importance of CSR issues in accounting research is evidenced by the two articles in this Forum (Dhaliwal et al. 2012; Kim et al. 2012), as well as by other recent CSR articles published in The Accounting Review (Dhaliwal et al. 2011; Balakrishnan et al. 2011; Simnett et al. 2009) and other outlets. Traditionally, scholars have considered two broad perspectives on CSR. Economics, finance, and accounting researchers (e.g., Friedman 1970; Shank et al. 2005; Dhaliwal et al. 2011), as well as some writers in the financial press (Karnani 2010), have typically taken the perspective that companies will, or should, only engage in socially responsible activities when doing so maximizes shareholder value. However, there is also a long history of an alternative perspective advocated by
We conduct an experiment to examine investment professionals’ use of corporate social responsibil... more We conduct an experiment to examine investment professionals’ use of corporate social responsibility (CSR) disclosures when making personal investment decisions or investment recommendations to clients. We predict and find that investment professionals are more willing to personally invest and recommend investment to a client when a firm discloses positive CSR performance than when it makes no CSR disclosures. Investment professionals’ decisions and recommendations are influenced by CSR disclosures both because, on average, they believe that better CSR performance results in better current and longer-term financial performance and because they value the societal benefits of CSR activities. We also find that investment professionals’ general beliefs regarding whether CSR activities benefit society affect how they assess firms’ CSR performance and their view of the relation between CSR performance and financial performance. Finally, investment professionals’ experience appears to protect them from the potential biasing effect of appealing pictures that accompany many CSR disclosures.
Prediction is one of the most important aspects of investment decision making. This study provide... more Prediction is one of the most important aspects of investment decision making. This study provides evidence that investors' predictive earnings judgments can be systematically influenced as a consequence of the combined effects of "output interference" and "Uavailability," and that the use of financial accounting information in the prediction process seems to provide limited benefit in terms of reducing this effect. Output interference is a psychological concept that implies that whatever is thought about first interferes with, and thus inhibits, later thoughts about an issue. An availability-based prediction strategy is one in which the decision maker uses the relative number of pro versus con reasons generated, and/or the ease with which such reasons can be generated, as cues in judging the likelihood of future events. Fifty-eight investors participated in an experiment that demonstrated that the order in which they considered opposing arguments regarding the possibility of reaching a specified level of earnings had an impact on both their ability to generate supporting and opposing reasons and their subsequent probability judgment that earnings would actually reach the specified level. The outcome for which the investors were able to generate the most supporting reasons was judged more probable. Investors were able to think of more reasons supporting a particular outcome, not because there were more such reasons in the objective environment, but rather as a consequence of output interference. The systematic effect on judgment, although perhaps slightly reduced, persisted when investors had access to financial statements while considering the company's earnings prospects. C ONSIDERABLE evidence presented in the judgment and decision-making literature indicates that individuals use heuristic procedures that simplify cognitive processing [Kahneman et al., 1982; Nisbett and Ross, 1980; Slovic et al., 1977; and Tversky and Kahneman, 1974]. In particular, people appear to employ cognitive heuristics when assessing or predicting the likelihood of uncertain events. Although these heuristic procedures are often efficient in that they reduce the complexities of such tasks, an extensive line of research indiI thank the members of my dissertation committee at the University of Wisconsin for their contributions to this research and for their professional guidance in general. This paper has also benefited from the helpful comments of my colleagues at the University of Pittsburgh, two helpful reviewers, and the participants of a University of Michigan accounting workshop. The research assistance of Sangho Do and Bonnie Morris, and the financial support of the Ernst & Whinney Foundation are gratefully acknowledged. Donald V. Moser is at The Joseph M. Katz Graduate School of Business, University of Pittsburgh. Manuscript received January 1988. Revisions received May 1988 and December 1988. Accepted December 1988.
ABSTRACT: A series of participative budgeting experiments has examined the effect of incentive st... more ABSTRACT: A series of participative budgeting experiments has examined the effect of incentive structures and/or information environments on employees' reporting and production decisions. We analyze the previous experiments in terms of the insights they offer regarding agency theory. We expand the previous analyses of the incentive contracting experiments in three ways. First, we classify the earliest set of participative budgeting experiments based on the type of incentive and information structures examined in each study. Second, from the 21 papers we review, we identify eight specific cases for which the experimental evidence contradicts an agency theory prediction (i.e., anomalies). Third, we develop a classification scheme that can be used to organize hypotheses in terms of whether they rely on an agency theory prediction, a competing behavioral prediction, or a combination of the two. We use this classification to illustrate why we believe that studies that test both an agency theory prediction and a competing behavioral prediction are more likely to advance the development of theory than those that do not.
ABSTRACT Although large audit firms in the U.S. and the U.K. have begun offshoring audit work, th... more ABSTRACT Although large audit firms in the U.S. and the U.K. have begun offshoring audit work, there is limited research on this expanding practice. We use a combination of survey, interview and experimental methods to examine audit client management’s 1) perceptions of, and reactions to, audit offshoring, 2) beliefs regarding the effect of offshoring on audit quality, and 3) willingness to trade off audit quality for lower audit fees. Our survey and interview results indicate that most audit client managers are unaware of offshoring. When informed of it, they are concerned that it could negatively affect audit quality, data security, and their ability to communicate with overseas audit staff. Clients believe that audit firms should be required to disclose their offshoring practices to their clients. Clients who are more familiar with offshoring are less concerned about it. The results of our experiment show that clients who believe that offshoring will lower audit quality are nevertheless willing to trade off quality for a reduction in audit fees. Our findings have implications for audit firms, clients and regulators. Audit firms can use our results to anticipate clients’ reactions to offshoring and to reassess their disclosure policies. Clients can use our findings as a basis for discussions with their auditors regarding offshoring and its potential impact on the audit process. Finally, regulators should find our results useful in their deliberations regarding the need to regulate audit offshoring and related disclosures.
M ost companies try to project an image of corporate social responsibility (CSR), often by volunt... more M ost companies try to project an image of corporate social responsibility (CSR), often by voluntarily supplementing their annual financial reports with separate CSR reports. Because such CSR reports represent additional disclosures, accounting researchers have become increasingly interested in the role that such disclosures play in firm valuation. The fundamental importance of CSR issues in accounting research is evidenced by the two articles in this Forum (Dhaliwal et al. 2012; Kim et al. 2012), as well as by other recent CSR articles published in The Accounting Review (Dhaliwal et al. 2011; Balakrishnan et al. 2011; Simnett et al. 2009) and other outlets. Traditionally, scholars have considered two broad perspectives on CSR. Economics, finance, and accounting researchers (e.g., Friedman 1970; Shank et al. 2005; Dhaliwal et al. 2011), as well as some writers in the financial press (Karnani 2010), have typically taken the perspective that companies will, or should, only engage in socially responsible activities when doing so maximizes shareholder value. However, there is also a long history of an alternative perspective advocated by
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