Information Pursuit in Financial Statement Analysis: Effects of Choice, Effort, and Reconciliation

Prior research provides evidence that information affects financial statement users' judgments less when that information is provided in a less accessible format (e.g., information disclosed in a footnote or less prominent financial statement rather than being recognized on the income statement [Maines and McDaniel 2000]). We provide evidence that, conditional on users performing the analysis necessary to transform the financial statements to appear as if disclosed information had been recognized, that information may affect users' judgments more than it would have if it had been recognized initially. Our experiments are set in the context of constructive capitalization of operating leases. The first experiment manipulates three variables that we hypothesize will contribute to this effect: choice to use transformed financial statements, effort spent on the transformation process, and reconciliation of pre‐ and post‐transformation numbers. We provide evidence that, in the constructive‐capitalization settin...

[1]  I. Zimmer.  THE EFFECT OF UNDERSTANDING ON ATTITUDES TO ACCOUNTING VARIABLES , 2009 .

[2]  Marc Picconi.  The Perils of Pensions: Does Pension Accounting Lead Investors and Analysts Astray? , 2006 .

[3]  Robert J. Bloomfield,et al.  Feedback loops, fair value accounting and correlated investments , 2006 .

[4]  James E. Hunton,et al.  Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information , 2006 .

[5]  Xiao-Jun Zhang,et al.  Accounting Treatment of Inherent versus Incentive Uncertainties and the Capital Structure of the Firm , 2006 .

[6]  James R. Frederickson,et al.  The Evolution of Stock Option Accounting: Disclosure, Voluntary Recognition, Mandated Recognition, and Management Disavowals , 2006 .

[7]  W. B. Elliott.  Are Investors Influenced by Pro Forma Emphasis and Reconciliations in Earnings Announcements , 2006 .

[8]  D. Hirshleifer,et al.  Disclosure to an Audience with Limited Attention , 2004 .

[9]  M. W. Nelson,et al.  Investing in Your Own Equity: Effects of Fair Value Accounting and Comprehensive Income Recognition on Earnings and Price Volatility , 2004 .

[10]  Laureen A. Maines,et al.  Does Search-facilitating Technology Improve the Transparency of Financial Reporting? , 2004 .

[11]  D. Eric Hirst,et al.  Fair values, income measurement, and bank analysts' risk and valuation judgments , 2004 .

[12]  Jill R. Hopper,et al.  A Research Tool to Increase Attention to Experimental Materials: Manipulating Presentation Format , 2003 .

[13]  D. Hirshleifer,et al.  Limited Attention, Information Disclosure, and Financial Reporting , 2003 .

[14]  I. Zimmer,et al.  Disclosure versus recognition: The case of asset revaluations , 2003 .

[15]  Lynn Piasecki,et al.  Accounting for Stock-Based Compensation , 2003 .

[16]  Kevin E. Jackson,et al.  Improving Financial Reports by Revealing the Accuracy of Prior Estimates Discussion of "Improving Financial Reports by Revealing the Accuracy of Prior Estimates" , 2003 .

[17]  Marlene Plumlee,et al.  The Effect of Information Complexity on Analysts' Use of that Information , 2003 .

[18]  Z. Rezaee,et al.  Stock price reaction and value relevance of recognition versus disclosure: the case of stock-based compensation , 2002 .

[19]  R. Bloomfield.  The 'Incomplete Revelation Hypothesis' and Financial Reporting , 2002 .

[20]  Geoffrey B. Sprinkle,et al.  The effects of monetary incentives on effort and task performance: theories, evidence, and a framework for research , 2002 .

[21]  D. Redelmeier,et al.  The Beguiling Pursuit of More Information , 2001, Medical decision making : an international journal of the Society for Medical Decision Making.

[22]  Michael D. Shields,et al.  Why Does Fixation Persist? Experimental Evidence on the Judgment Performance Effects of Expensing Intangibles , 2001 .

[23]  Steven J. Kachelmeier,et al.  Market Efficiency, Bounded Rationality, and Supplemental Business Reporting Disclosures , 2001 .

[24]  D. Eric Hirst,et al.  Improving Financial Reports by Revealing the Accuracy of Prior Estimates , 2001 .

[25]  Chao-Shin Liu,et al.  Recognition and Disclosure Reliability: Evidence from SFAS No. 106 , 2002 .

[26]  Mary E. Barth,et al.  The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting: Another View , 2001 .

[27]  Ross L. Watts,et al.  The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting , 2000 .

[28]  Linda S. McDaniel,et al.  Effects of Comprehensive‐Income Characteristics on Nonprofessional Investors' Judgments: The Role of Financial‐Statement Presentation Format , 2000 .

[29]  V. Beattie,et al.  Operating leases and the assessment of lease–debt substitutability , 2000 .

[30]  Chao-Shin Liu,et al.  The Value Relevance of Financial Statement Recognition vs. Disclosure: Evidence from SFAS No. 106 , 1999 .

[31]  R. Houston,et al.  Purchase, Pooling, and Equity Analysts' Valuation Judgments , 1999 .

[32]  L. Revsine,et al.  Financial Reporting and Analysis , 1999 .

[33]  T. Mitchell,et al.  Disclosure of contingent environmental liabilities: Some unintended consequences? , 1998 .

[34]  D. Eric Hirst,et al.  Comprehensive income reporting and analysts' valuation judgments , 1998 .

[35]  E. Shafir,et al.  On the pursuit and misuse of useless information. , 1998, Journal of personality and social psychology.

[36]  Donald R. Jones,et al.  Reliance on Decision Aids: An Examination of Auditors' Assessment of Management Fraud , 1997 .

[37]  Patrick E. Hopkins,et al.  The Effect of Financial Statement Classification of Hybrid Financial Instruments on Financial Analysts' Stock Price Judgments , 1996 .

[38]  K. Ely.  Operating Lease Accounting and the Market's Assessment of Equity Risk , 1995 .

[39]  S. Plous.  The psychology of judgment and decision making , 1994 .

[40]  R. Lipe,et al.  The Effects of Recognition versus Disclosure on Shareholder Risk and Executive Compensation , 1993 .

[41]  Eric J. Johnson,et al.  The adaptive decision maker , 1993 .

[42]  John W. Payne,et al.  The adaptive decision maker: Name index , 1993 .

[43]  Alan J. Mayne,et al.  Decision Research: A Field Guide , 1990 .

[44]  Jerry R. Strawser,et al.  The Impact of New Pension Disclosure Rules on Perceptions of Debt , 1987 .

[45]  Paul Slovic,et al.  Graphic Representation of Judgmental Information , 1986, SGCH.

[46]  D. A. Kenny,et al.  The moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations. , 1986, Journal of personality and social psychology.

[47]  T. Wilkins,et al.  A Behavioural Investigation of Alternative Methods of Financing Capital Acquisitions and Lease Capitalisation , 1984 .

[48]  P. Slovic,et al.  Preference Reversals: A Broader Perspective , 1983 .

[49]  A. Abdel-khalik.  The economic effects on lessees of FASB statement no. 13, accounting for leases , 1982 .

[50]  Robert S. Kaplan,et al.  Empirical Analysis of the Commercial Loan Classification Decision , 1982 .

[51]  B. M. Staw.  The Escalation of Commitment To a Course of Action , 1981 .

[52]  John Duncan,et al.  The demonstration of capacity limitation , 1980, Cognitive Psychology.

[53]  A. Abdel-khalik,et al.  Information Choice and Utilization in an Experiment on Default Prediction , 1980 .

[54]  Susan T. Fiske,et al.  The independence of evaluative and item information: Impression and recall order effects in behavior-based impression formation. , 1979 .

[55]  B. Fischhoff,et al.  Fault trees: Sensitivity of estimated failure probabilities to problem representation. , 1978 .

[56]  R. E. Taylor,et al.  The Impact of Reporting Leases Off-the Balance Sheet on Bond Risk Premiums: Two Exploratory Studies , 1978 .

[57]  Shelley E. Taylor,et al.  Salience, Attention, and Attribution: Top of the Head Phenomena , 1978 .

[58]  L. Z. McArthur,et al.  Figural emphasis and person perception. , 1977 .

[59]  R. Lyman Ott.,et al.  An introduction to statistical methods and data analysis , 1977 .

[60]  D. Kahneman.  Attention and Effort , 1973 .

[61]  D. Bem.  Self-Perception Theory , 1972 .

[62]  W. J. Vatter.  Accounting For Leases , 1966 .

[63]  Elliot Aronson,et al.  The effect of severity of initiation on liking for a group. , 1959 .

[64]  L. Festinger.  A Theory of Cognitive Dissonance , 1957 .

[65]  L. J. Savage,et al.  The Foundations of Statistics , 1955 .