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experimentalresearchinaccounting financial markets affects how individual deci-
sions result in aggregate market outcomes,
OzlemArikan such as price, volume, and liquidity. Individual
goals influence the interaction of incentives and
Experimental accounting research is a broad actions of various parties such as managers,
field that examines financial communication auditors, investors, and analysts, related to
among managers, auditors, information inter- reporting, forecasting, and investment deci-
mediaries, and investors. Experimental research sion making. Focusing on these institutional
in accounting takes the advantage of disentan- features allows experimental researchers to
gling variables that are confounded in natural strengthen the external validity of the exper-
settings and measuring intervening processes iments and shed light on how changes in
to draw casual inferences. Theories from the institutional features modify participants
psychology and economics allow this field to behavior (Libby, Bloomfield, and Nelson,
specify clearly the mechanisms that affect indi- 2002).
vidual and market behaviors (Libby, Bloomfield, Most research in experimental accounting
andNelson,2002). uses a judgment and decision-making task,
The early experimental papers published in where one or more pieces of information are
major accounting journals in the 1960s and manipulated across or within participants, who
1970s faced serious criticisms because of the answer some questions about their judgments
irrelevance of individual behavior in market and decisions. The manipulations include,
settings, in which competitive forces eliminate but are not limited to, content, format, place-
individual errors. Such papers were also crit- ment, and existence of some information. Some
icized because they failed to capture relevant experiments also include eye-tracking or verbal
aspects of the decisions of interest, in partic- protocol analysis techniques. For example,
ular, decision-maker attributes and institutional Hunton and McEwen (1997) use computerized
features. In the late 1980s and 1990s, numerous eye-movement retinal system to capture the
papers reported inefficiencies in the finan- relationship between analysts search strategy
cial markets, rendering the previous criticism and their forecast accuracy. They conclude that
on experimental accounting on the basis of more accurate analysts employ a directive infor-
market inefficiency less relevant. Accounting mation search strategy, whereas less accurate
papers published in the 1990s and thereafter analysts employ a sequential search strategy.
also took into account a broad range of insti- On another instance, Bouwman, Frishkoff, and
tutional features, which helped to mitigate Frishkoff (1995) ask analysts to think aloud
the criticisms about failing to capture institu- while evaluating generally accepted accounting
tional features (Libby, Bloomfield, and Nelson, principle (GAAP) based and nonGAAP-based
2002). information. Using a verbal protocol analysis,
Twokeyindividualcharacteristicsofpreparers they find that GAAP-based information plays a
and users of accounting information are their significant role in each phase of the evaluation
knowledge and motivation. These individuals process, mainly in the familiarizing activity, but
at least should have sufficient knowledge of its usage declines during exploration and scan-
accounting regulations and are motivated to ning stage. They also find that nonGAAP-based
pay attention to the task they are performing information is particularly important during
in their fields. Key environmental characteris- reasoning stage.
tics of an accounting setting are the complex Trotman, Tan, and Ang (2011) give a recent
regulations, the existence of financial markets, review of the experimental accounting research
and strategic interactions of the reporters and (except for tax accounting). The following
users of financial information. Regulations sections give some examples of experimental
determine financial reporting choices available accounting research in financial accounting,
for managers and auditors as well as sanctions managerial accounting, taxation and auditing
about the misuse of these rules. Existence of areas.
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper.
Copyright © 2014 John Wiley & Sons, Ltd.
2 experimentalresearchinaccounting
EXPERIMENTALRESEARCHINFINANCIAL Bhojraj and Libby (2005) examine whether an
ACCOUNTING increaseincapitalmarketpressureandreporting
Experimental financial accounting research frequency causes managers to display “myopic”
can broadly be classified in three categories. investment behavior, that is, the tendency to
The first category involves the determinants of chooseprojects with higher short-term earnings
how information providers report events. For but poorer overall cash flows, and finds this to
example, Nelson and Kinney (1997) provide be the case. With respect to individual biases
evidence that auditors are more (less) conser- affecting market prices, Calegari and Fargher
vative when the relevant evidence is precise (1997) show that post-earnings drift persists in
(ambiguous). In another context, Libby et al. a double auction market and Tuttle, Coller, and
(2008) investigate whether analyst incentives Burton (1997) show that recency effects (the
to maintain relationship with management most recent information received affecting the
explain the optimistic and pessimistic patterns market prices more than previous information
in analyst forecasts. They find that analysts received) extend to the market level (Libby,
deliberately issue lower forecasts before earnings Bloomfield, and Nelson, 2002).
announcements because they believe that the EXPERIMENTALRESEARCHINMANAGERIAL
action will lead greater access to management. ACCOUNTING
Their finding is particularly interesting as the
experiment was conducted after the Regula- Experimental managerial accounting, which
tion Fair Disclosure (2000), which requires focuses on information necessary for planning
management to simultaneously disclose infor- and decision making of managers, and that
mation to all investors (Trotman, Tan, and improves employee abilities to make organiza-
Ang, 2011). The second category involves the tionally desirable decisions, can be classified
determinants of the way accounting informa- in two broad categories. The first category
tion users interpret accounting information. involves the facilitating role of accounting infor-
Frederickson and Miller (2004) find significant mation on decisions of managers to reduce
differences in the use of pro forma earnings pre-decision uncertainty (Sprinkle, 2003). For
by nonprofessional investors and analysts. In example, Lipe and Salterio (2002) find that
their experiment, the stock price estimation for a balanced scorecards organization affects
nonprofessional investors who received both performance evaluations in certain conditions.
pro forma and GAAP earnings was higher than Frederickson, Peffer, and Pratt (1999) find
that of nonprofessional investors who received that more frequent feedback can sometimes
only GAAP earnings. In contrast, the stock bias judgments. Similarly, Krishnan, Luft,
price judgments of financial analysts were not and Shields (2005) find that decision-makers
affected by the pro forma disclosures. In another are significantly influenced by performance
context, Koonce, McAnally, and Mercer (2005) measure error variance and covariance, and
examine whether financial instrument disclo- overall, underreact to an accounting change
suresincreaseinvestorability to better assess the that alters performance measurement error.
riskiness of a firm. They find that investors are The second category involves the examination
affected by the labels used in the disclosures but of managerial accounting information in moti-
additional information about the risk exposure vating employees (Sprinkle, 2003). In this area,
does not change their initial judgments. The Fisher, Frederickson, and Peffer (2000) find that
third category involves the strategic interaction budgetssetthroughanegotiationprocessending
between providers and users of accounting in agreement contain significant less slack than
information and examines how such interaction unilaterally agreed budgets; however, a failed
affects reporting and market outcomes. Jackson negotiation followed by superiors imposing
(2008) finds that the adoption of straight line a budget has a significant detrimental effect
depreciation rather than accelerated deprecia- on subordinate performance. Balakrishnan,
tion causes nonexecutive managers to invest in Sprinkle, and Williamson (2011) find that even
projects that do not maximize value. Similarly, whenemployeescannotberemuneratedfortheir
experimentalresearchinaccounting 3
actions, employee contributions to employers knowledge of supervisors views increases the
significantly increase as the level of corporate preparers tendencies to agree with the views of
giving increases. For a comprehensive review of the reviewers. He finds that auditors who learn
experimental papers in managerial accounting, the partners view before evaluating evidence
please see Sprinkle (2003). evaluate individual evidence items as more
consistent with the partners view, and make
EXPERIMENTALRESEARCHINTAXATION going-concern judgments that are more consis-
Experimental research in taxation examines tent with the partners view, than do auditors
individuals decisions regarding taxation under who learn the same partners view after evalu-
different regulations or conditions. For example, ating evidence. Reffett (2010) examines juror
Falsetta and White (2005) examine the effect reactions to auditors brainstorming process. He
that stock position (gain or loss) and income finds that jurors are more likely to hold audi-
tax withholding position (tax payment or tax tors liable for failing to detect fraud when the
refund) have on the sale of stock at the end of auditors investigate for the perpetrated fraud,
the year. They find that when tax considerations relative to when the auditors do not investigate
are the primary factor in their decision process, for the fraud.
individuals sell loss stocks and hold gain stock,
and this propensity is the same whether they Bibliography
are faced with a tax payment or a tax refund.
Slemrod, Blumenthal, and Christian (2001) Balakrishnan, B., Sprinkle, G.B. and Williamson, M.G.
examine the results of a natural experiment (2011) Contracting benefits of corporate giving: an
involving a change in the probability of an audit: experimental investigation. The Accounting Review
In 1995, a group of 1724 randomly selected November2011,86(6),1887–1907.
Minnesota taxpayers were informed by a letter Bhojraj, S. and Libby, R. (2005) Capital market pres-
that the returns they were about to file would sure, disclosure frequency-induced earnings/cash
be “closely examined.” Compared to a control flow conflict, and managerial myopia. The Accounting
group that did not receive this letter, low and Review, 80, 1–20.
middle-incometaxpayersinthetreatmentgroup Bouwman, M.J., Frishkoff, P.A. and Frishkoff, P. (1995)
on average increased tax payments compared The relevance of GAAP-based information: a case
to the previous year. The effect was much studyexploringsomeusesandlimitations.Accounting,
Horizons, 9 (4), 22–47.
stronger for those with more opportunity to Calegari, M. and Fargher, N.L. (1997) Evidence that
evade; surprisingly, however, the reported tax prices do not fully reflect the implications of current
liability of the high income treatment group earnings for future earnings: an experimental markets
fell sharply relative to the control group. For a approach. Contemporary Accounting Research, 14 (3),
comprehensivereviewofexperimentalpapersin 397–433.
taxation, please see Torgler (2002). Falsetta, D. andWhite,R.A.(2005)Theimpactofincome
taxwithholdingpositionandstockpositiononthesale
EXPERIMENTALRESEARCHINAUDITING of stock. Journal of American Taxation Association, 27
(1), 1–23.
Experimental research in auditing examines Fisher, J.G., Frederickson, J.R. and Peffer, S.A. (2000)
auditor decision-making processes including Budgeting: an experimental investigation of the
review,negotiation,brainstorming,andsampling effects of negotiation. The Accounting Review, 75,
processes. Koonce, Anderson, and Marchant 93–114.
(1995), for example, examine how the antici- Frederickson, J.R. and Miller, J.S. (2004) The effects
pation of the review process and the degree to of pro forma earnings disclosures on analysts and
which evidence supporting or refuting manage- nonprofessional investors equity valuation judg-
ment explanations influence the justifications ments. The Accounting Review, 79, 667–686.
of audit planning decisions. They find that Frederickson,J.R.,Peffer,S.A.andPratt,J.(1999)Perfor-
auditors anticipating an audit review document mance evaluation judgments: effects of prior experi-
enceunderdifferentperformanceevaluationschemes
agreaternumberofjustificationsthanthosewho and feedback frequencies. Journal of Accounting
do not. Wilks (2002) examines whether earlier Research, 37, 151–165.
4 experimentalresearchinaccounting
Hunton,J.E.andMcEwen,R.A.(1997)Anassessmentof Nelson, M.W. and Kinney, W.R. (1997) The effect of
the relation between analysts earnings forecast accu- ambiguity on auditors loss contingency reporting
racy, motivational incentives and cognitive informa- judgments. The Accounting Review, 72 (2), 257–274.
tion search strategy. The Accounting Review, 72 (4), Reffett, A. (2010) Can identifying and investigating
497–515. fraud risks increase auditors liability? The Accounting
Jackson, S.B. (2008) The effect of firms depreciation Review, 85 (6), 2145–2167.
methodchoice on managers capital investment deci- Slemrod, J., Blumenthal, M. and Christian, C. (2001)
sions. The Accounting Review, 83, 351–376. Taxpayerresponseonanincreaseprobabilityofaudit:
Koonce,L.,Anderson,U.andMarchant,G.(1995)Justi- evidence from a controlled experiment in Minnesota.
fication of decisions in auditing. Journal of Accounting Journal of Public Economics, 79, 455–483.
Research, 33, 369–384. Sprinkle, G.B. (2003) Perspectives on experimental
Koonce, L., McAnally, M.L. and Mercer, M. (2005) research in managerial accounting. Accounting Orga-
Judging the risk of financial instruments: problems nizations and Society, 28, 287–318.
and potential remedies. The Accounting Review, 80, Torgler, B. (2002) Speaking to theorists and searching for
871–895. facts: tax morale and tax compliance in experiments.
Krishnan, R., Luft, J.L. and Shields, M.D. (2005) Journal of Economic Surveys, 16 (5), 657–683.
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