NRE 504 outline Spring 1995 - Baylor University



Johnson Graduate School of Management

Cornell University

NRE 504

Seminar in Judgment and Decision Making Research in Accounting

Autumn/Winter, 2002/03

Robert Libby Mark W. Nelson

383 Sage Hall 448 Sage Hall

255-3348 255-6323

RL54@Cornell.edu MWN2@Cornell.edu

This seminar introduces the major areas of current inquiry in judgment and decision making (or behavioral decision making research) in financial accounting, and to a lesser extent, auditing.[1] The seminar is designed to provide sufficient background for educated consumption of this literature and pursuit of further study. We will concentrate equally on the major theoretical and methodological issues faced by those who conduct this research. At the same time, given the applied nature of accounting, we will assess the practical implications of the research. The only required background for the course is a basic understanding of regression and ANOVA and some understanding of the role of accounting in society.

Where possible, the assignments begin with a reading from a book or review article that will introduce you to the issues addressed and methodologies used in the area. This is followed by one or more specific studies. Expect some minor changes in the course assignments during the term depending on the interests of the class members.

Papers marked with a plus (+) are important background readings (normally review papers). Every student should be prepared to discuss all of the starred (*) papers in detail. In addition, individual students will be assigned to lead the discussions of these starred (*) papers. You should briefly skim the papers marked with a number sign (#). Those typically will be discussed in our opening remarks.

Each student is required to write a proposal for a research project that involves the experimental analysis of a judgment and decision making issue in accounting. Students can propose an extension of an existing study or a more original project. As we will learn, simplicity (as well as elegance and cleverness) is a virtue in experimental design, so keep your ideas simple. The purpose of the project is to provide insights into the problems that one faces when attempting to examine even simple ideas experimentally, and thus enhance our ability to understand and evaluate the literature. Proposals will be presented during the last two weeks of the seminar.

All readings will be distributed. Abbreviations used on the following pages are:

AH Accounting Horizons

AOS Accounting Organizations and Society

Aud. Auditing: A Journal of Practice and Theory

AR Accounting Review

JAE Journal of Accounting and Economics

JAR Journal of Accounting Research

OBHDP Organizational Behavior and Human Decision Processes

PB Psychological Bulletin

WP Working Paper

|Class |Date |Topic |Assignments |

| 1 |10/18 |Introduction to Behavioral Decision Research |Libby, pp. 1-9+ |

| |2:30-5:3| |Carroll & Johnson Chap. 1, 2+ |

| |0 | |Hogarth (AOS 1993)+ |

| | | |Libby & Luft (AOS 1993) pp. 425-428+ |

| | | |Libby, Bloomfield and Nelson (AOS 2002) secs. 1,2+ |

| | | | |

| | |Experimental Designs and Operational Plans |Libby, pp. 10-16+ |

| | | |Runkel, Ch. 3+ |

| | | |Libby, Bloomfield and Nelson (AOS 2002) sec. 4+ |

| | | | |

| 2 |10/23 |Auditing 1 |Solomon and Shields (1995)+ |

| |2-5 | |Libby & Luft (AOS 1993) pp. 428-438+ |

| | |Fraud Risk |Wilks and Zimbelman (2002 WP)* |

| | |Expertise |Tan and Libby (JAR 1997)* |

| | |Frequency knowledge + memory structure + decision aiding (Mark |Bonner et al. (AR 1996)* |

| | |will present Bonner et al.) | |

| | | | |

|3 |10/30 |Auditing 2: Superior-subordinate interactions |Libby & Luft (AOS 1993) pp. 438-444+ |

| |2-5 | |Libby and Trotman (AOS, 1993)+ |

| |Rm. 135 | |Kennedy (JAR 1993)* |

| | | |Peecher (JAR 1996)* |

| | | |Tan and Jamal (TAR 2001)+ |

| | | |Brazel, Agoglia, and Hatfield (WP 2002)* |

| | | | |

|4 |11/6 |Motivated Reasoning I: Taking apart the process |Libby, Bloomfield and Nelson (AOS 2002) sec 3.1+ |

| |2-5 |(Bob will present H&M 1997) |Hunton and McEwen (AR 1997)* |

| |Rm. 135 | |Wilks (AR 2002)* |

| | | |Hunton and Bealer (2002 WP)* |

| | | | |

|5 |11/15 |Motivated Reasoning II: Taking apart the process and the results |Phillips (OBHDP 2002)* |

| |4-7 |of negotiation (Mark will present Nelson) |Nelson (AH 2003)* |

| |Rm. B11 | |Libby and Kinney (AR 2000)* |

| | | | |

|6 |11/22 |Negotiation (Mark will present Nelson et al.) |Negotiating Tips (The Mediator 9/26/2002)+ |

| |4-7 | |Nelson, Elliott, Tarpley (AR 2002)* |

| |Rm. B10 | |Trotman, Wright and Wright (2002 WP)* |

| | | |Tan and Ng (2002 WP)* |

| | | | |

| 7 |12/4 |Transparency 1: Evidence of a problem (Bob will present Hopkins) |Libby, Bloomfield and Nelson (2002) sec 3.2 + |

| |2-5 | |Hopkins (JAR 1996)* |

| |Rm. B10 | |Maines and McDaniel (AR 2000)* |

| | | |Koonce, Lipe, McAnally (2002 WP)* |

| | | | |

|8 |12/11 |Transparency 2: Possible solutions (Mark will present Nelson et |Hodge, Kennedy and Maines (2002 WP)* |

| |2-5 |al.) |Luft and Shields (AR 2001)* |

| |Rm. 135 | |Nelson, Krische, Bloomfield (JAR 2002)* |

|9 |1/21 |Voluntary disclosures 1: Disclosures of Estimates |Kennedy, Mitchell and Sefcik (JAR 1998)* |

| |8:30-12:00| |Hirst, Koonce and Miller (JAR 1999)* |

| | | |Libby and Tan (JAR 1999)* |

| | | | |

|10 |2/6 |Voluntary disclosures 2: Preannouncements |Tan, Libby and Hunton (JAR 2002)* |

| |(Thurs) | |Miller (2002 WP)* |

| |8:30-12:00| |Libby, Tan, and Hunton (WP 2002)# |

| | | |Mercer (2002 WP)* |

| | | | |

|11 |2/13 |Voluntary Disclosure 3: Other Effects |Krische (2002 WP)* |

| |(Thurs) | |Frederickson and Miller (2002 WP)* |

| |8:30-12:00| |Sedor (TAR 2002)* |

| | | | |

|12 |2/25 |Memory and Affect |Tuttle, Coller and Burton (AOS 1997)* |

| |(Tues) | |Kida and Smith (AOS 1995)# |

| |8:30-12:00| |Kida, Smith, and Maletta (AOS 1998)* |

| | | |Moreno, Kida, and Smith (JAR 2002)* |

| | | | |

|13 |3/25 |Proposals |Present Proposals |

|14 |3/27 | | |

|15 |4/1 | | |

| |8:30-12:00| | |

READINGS

BOOKS

Carroll, J.S. and Johnson, E. Decision Research: A Field Guide. Sage, 1990.

Libby, R., Accounting and Human Information Processing: Theory and Applications. Prentice-Hall, 1981.

Runkel, P. and McGrath, J., Research on Human Behavior: A Systematic Guide to Method. Holt, Rinehart and Winston, Inc., 1972.

ARTICLES

Beeler, J.D., and J.E. Hunton (2002). Contingent economic rents: Insidious threats to audit independence. Working paper, Millsaps College.

Brazel J.F., C.P. Agoglia, and R.C. Hatfield (2002). Electronic vs. face-to-face review: The effects of alternative forms of review on audit preparer performance. Working paper, Drexel University.

Bonner, S. E., R. Libby, and M. Nelson (1996). Using decision aids to improve auditors’ conditional probability judgments. The Accounting Review, 71(2): 221-240.

Fredrickson, J.R., and J.S. Miller. (2002). Pro forma earnings disclosures: Do analysts and nonprofessional investors react differently? Working paper, Hong Kong University of Science and Technology.

Hirst, D.E., L. Koonce, and J. Miller. (1999). The joint effect of management's prior forecast accuracy and the form of its financial forecasts on investor judgment. Journal of Accounting Research, 37: 101-123.

Hodge, F., J.J. Kennedy, and L.A. Maines (2002). Recognition versus disclosure in financial statements: Does searchable technology improve transparency? Working paper, University of Washington.

Hogarth, R. M. (1993). Accounting for decisions and decisions for accounting. Accounting, Organizations and Society, 18(5): 407-424.

Hopkins, P.E. (1996). The effect of financial statement classification of hybrid financial instruments on financial analysts' stock price judgments. Journal of Accounting Research, 34: 33-40.

Hunton, J. E. and R. A. McEwen (1997). An assessment of the relation between analysts’ earnings forecast accuracy, motivational incentives and cognitive information search strategy. The Accounting Review, 72(4): 497-515.

Kennedy, J. (1993). Debiasing audit judgment with accountability: A framework and experimental results. Journal of Accounting Research, 31(2): 231-245.

Kennedy, J.,T. Mitchell, and S.E. Sefcik. (1998). Disclosure of contingent environmental liabilities: Some unintended consequences? Journal of Accounting Research, 36(2): 257-277.

Kida, T., J.F. Smith, and M. Maletta. (1998). The effects of encoded memory traces for numerical data on accounting decision making. Accounting, Organizations and Society, 23(5/6): 451-466.

Kida, T., and J.F. Smith (1995). The encoding and retrieval of numerical data for decision making in accounting contexts: Model development. Accounting, Organizations and Society, 20(7,8): 585-

Koonce, L., M.G. Lipe, and M.L. McAnally. (2002). The effect of disclosure choices on investors’ risk assessments of financial instruments. Working paper, University of Texas.

Krische, S.D. (2002). Investors' Evaluations of Strategic Prior-Period Benchmark Disclosures in Earnings Announcements. Working paper, University of Illinois at Urbana-Champaign.

Libby, R., R. Bloomfield, and M. Nelson (2002). Experimental research in financial accounting. Accounting Organizations and Society,27(8): 775-810.

Libby, R. and W. R. Kinney, Jr. (2000). Does mandated audit communication reduce opportunistic corrections to manage earnings to forecasts? The Accounting Review, 75(4): 383-404.

Libby, R. and J. Luft (1993). Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment. Accounting, Organizations and Society, 18(5): 425-450.

Libby, R. and H.T. Tan (1999). Analysts' reaction to warnings of negative earnings surprises. Journal of Accounting Research, 37(2): 415-435.

Libby, R., H.T. Tan, and J.E. Hunton. Do pre-announcement form and track record affect analysts’ reactions to earnings pre-announcement strategies? (2002). Working paper, Cornell University.

Libby, R., and K.T. Trotman. (1993). The review process as a control for differential recall of evidence in auditor judgments. Accounting, Organizations and Society, 18(6): 559-574.

Luft, J.L., and M.D. Shields. (2001). Why does fixation persist? Experimental evidence on the judgment performance effects of expensing intangibles. The Accounting Review, 76(4): 561-587.

Maines, L. A., and L. S. McDaniel. (2000). Effects of comprehensive-income characteristics on nonprofessional investors’ judgments: the role of financial-statement presentation format. The Accounting Review 75(2): 179-207.

Mercer, M. (2002). The credibility consequences of managers’ decisions to provide warnings about unexpected earnings. Working paper, Emory University.

Miller, J.S. (2002). Effects of pre-announcements on investor reactions to earnings news. Working paper, University of Notre Dame.

Moreno, K., T. Kida, and J. F. Smith (2002) The impact of affective reactions on risky decision making. Journal of Accounting Research, (v. 40, December) 1331-50.

Nelson, M. W. (2002) Behavioral evidence about how principles- and rules-based standards affect behavior: Precision, complexity, communication, and constraint. Forthcoming, Accounting Horizons.

Nelson, M.W., S. Krische, and R. Bloomfield. (2002). Confidence and investors’ reliance on disciplined trading strategies. Forthcoming, Journal of Accounting Research.

Nelson, M. W., J. A. Elliott, and R. L. Tarpley. (2002). Evidence from auditors about managers’ and auditors’ earnings management decisions. Forthcoming, The Accounting Review (Quality of Earnings Conference Issue).

Peecher, M. (1996) "The influence of auditors' justification processes on their decisions: A cognitive model and experimental evidence." Journal of Accounting Research. (v. 34, Spring) 125-40.

Phillips, F. (2002). The distortion of criteria after decision-making. Organizational Behavior and Human Decision Processes, 88: 769-784.

Sedor, L.M. (2002). An explaination for unintentional optimism in analysts’ earnings forecasts. The Accounting Review, 77(4): 731-753.

Smith, J. F. and T. Kida (1991). Heuristics and biases: Expertise and task realism in auditing. Psychological Bulletin, 109(3): 472-489.

Solomon, I. and M.D. Shields (1995). Judgment and decision making in auditing.

Surratt, R. (2002). The Mediator. Available at:

Tan, H.T., and K. Jamal (2001). Do auditors objectively evaluate their subordinates' work? The Accounting Review, 76(1): 99-110.

Tan, H. T. and R. Libby (1997). Tacit Managerial versus Technical Knowledge as Determinants of Audit Expertise in the field. Journal of Accounting Research, 35(1): 97-114.

Tan, H. T., R. Libby, and J.E. Hunton (2002). Analysts' reactions to earnings pre-announcement strategies. Journal of Accounting Research, 40(1): 223-246.

Tuttle, B., M. Coller, and F.G. Burton. (1997). An examination of market efficiency: Information order effects in a laboratory market. Accounting, Organizations and Society, 22(1): 89-103.

Ng, T. and H.T. Tan. (2002). Effects of authoritative guidance availability and audit committee effectiveness on auditors’ judgments in auditor-client negotiations of audit adjustments. Working paper, Nanyang Technological University.

Trotman, K., A. Wright, and S. Wright (2002). Auditor negotiations: an examination of the efficacy of intervention methods. Working Paper, University of New South Wales.

Wilks, T. J., and M. F. Zimbelman (2002). The effects of a fraud-triangle decomposition of fraud risk assessments on auditors’ sensitivity to incentive and opportunity cues. Working Paper, Brigham Young University.

Wilks, T. J. (2002). Pre-decisional distortion of evidence as a consequence of real-time audit review. The Accounting Review, 77(1): 51-71.

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[1] We will not focus on the experimental markets literature, which was covered in Professor Bloomfield’s seminar last year.

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As of February 4, 2003

As of February 4, 2003

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