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How Repeated Notifications and Notification Checking Mode Affect Investors’ Reactions to Managers’ Strategic Title Emphasis?
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Research summary
We investigate the role of a firm's dividend and growth reputations in shaping investors' interpretations of acquisitions as a negative or positive expectation violation. While our findings reveal that both an acquiring firm's dividend and growth reputations trigger positive investor reactions, they also show that investors react negatively to an acquisition of a target firm with a strong growth reputation when the acquiring firm has a strong dividend reputation. We also find that investors are inclined to give managers “the benefit of the doubt” to the extent that an acquiring firm strategically frames an acquisition announcement in such a way that it provides assurance to investors that the acquisition is meant to exceed investors' expectations about shareholder value creation.
Managerial summary
We study why investors respond to some acquisitions positively and others negatively. We find that the way acquiring and target firms have created shareholder value in the past, and the information conveyed in the acquisition announcements are important determinants of investors' differential reactions to acquisitions. Our findings show that while investors generally react positively to acquisitions by firms known for creating value either through dividends or growth, their reactions become negative when a firm known for value creation through dividends acquires a target known for value creation through growth. We further find that managers can favorably influence investor reactions by making it salient in the acquisition announcement how the acquisition is intended to exceed investors' value creation expectations from the acquiring firm.
We propose and support a salience explanation of exposure effects. We suggest that repeated exposure to stimuli influences evaluations by increasing salience, the relative quality of standing out from other competing stimuli. In Experiments 1 and 2, we manipulated exposure, presenting some stimuli 9 times and other stimuli 3 times, 1 time, or 0 times, as in previous mere exposure research. Exposure increased liking, replicating previous research (Zajonc, 1968), and increased salience, made evaluations more extreme, and made stimuli more emotionally intense. Across experiments, results of multiple mediation models and a causal chain of experiments supported the idea that salience explains these exposure effects. Fluency and apprehension, two constructs that have been invoked to explain mere exposure, accounted for less of these effects according to the mediation models and the chain of experiments. We next manipulated relative exposure and absolute exposure orthogonally, finding that relative exposure increases liking more than absolute exposure. Stimuli presented 9 times were liked more when other stimuli in the context were presented less than 9 times than when the other stimuli were presented more than 9 times (Experiment 4). Whereas absolute exposure had no significant effect in Experiment 4, relative exposure increased liking, extremity, and emotional intensity. In Experiment 5, a direct manipulation of salience increased liking, evaluative extremity, and emotional intensity. These results suggest that salience partially explains effects previously attributed to absolute “mere” exposure.
Limited attention theory predicts that higher salience of earnings news implies a stronger
immediate market reaction to earnings news and a weaker post-earnings announcement drift
(PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of
quantitative items in an earnings press release headline, we find strong evidence consistent
with salience effects. Higher SALIENCE is associated with stronger announcement reaction
and subsequent PEAR. Managers are more likely to choose higher SALIENCE before selling
shares in the post-announcement period and when earnings are high but less persistent, and to
choose lower SALIENCE before stock option grants. The results are robust to using residual
salience and an extended set of control variables. The findings are consistent with managers
opportunistically headlining positive financial information in the earnings press release to
incite overoptimism in investors with limited attention.
Notifications are extremely beneficial to users, but they often demand their attention at inappropriate moments. In this paper we present an in-situ study of mobile interruptibility focusing on the effect of cognitive and physical factors on the response time and the disruption perceived from a notification. Through a mixed method of automated smartphone logging and experience sampling we collected 10372 in-the-wild notifications and 474 questionnaire responses on notification perception from 20 users. We found that the response time and the perceived disruption from a notification can be influenced by its presentation, alert type, sender-recipient relationship as well as the type, completion level and complexity of the task in which the user is engaged. We found that even a notification that contains important or useful content can cause disruption. Finally, we observe the substantial role of the psychological traits of the individuals on the response time and the disruption perceived from a notification.
In daily life, we frequently encounter false claims in the form of consumer advertisements, political propaganda, and rumors. Repetition may be one way that insidious misconceptions, such as the belief that vitamin C prevents the common cold, enter our knowledge base. Research on the illusory truth effect demonstrates that repeated statements are easier to process, and subsequently perceived to be more truthful, than new statements. The prevailing assumption in the literature has been that knowledge constrains this effect (i.e., repeating the statement "The Atlantic Ocean is the largest ocean on Earth" will not make you believe it). We tested this assumption using both normed estimates of knowledge and individuals' demonstrated knowledge on a postexperimental knowledge check (Experiment 1). Contrary to prior suppositions, illusory truth effects occurred even when participants knew better. Multinomial modeling demonstrated that participants sometimes rely on fluency even if knowledge is also available to them (Experiment 2). Thus, participants demonstrated knowledge neglect, or the failure to rely on stored knowledge, in the face of fluent processing experiences. (PsycINFO Database Record
(c) 2015 APA, all rights reserved).
The influence of complex language in a counterattitudinal appeal to laypeople was examined using dual process theories of persuasion. These theories propose that persuasion can result from cognitive elaboration of message arguments, or from more peripheral/heuristic strategies that do not involve argument scrutiny. One hundred four undergraduates listened to a counterattitudinal speech that varied in argument strength, wording complexity/comprehensibility, and source status. They then completed an attitude measure, a thought listing task, and an argument recall task. When arguments were easy to comprehend, attitudes were more favorable when the arguments were strong versus weak. When arguments were difficult to comprehend, attitudes were more favorable when the source was of high versus low status. Mediational analyses suggested that cognitive elaboration mediated persuasion when comprehension was easy, whereas cognitive elaboration as well as less effortful peripheral/heuristic processing mediated persuasion when comprehension was difficult.
Notifications are a core feature of mobile phones. They inform users about a variety of events. Users may take immediate action or ignore them depending on the importance of a notification as well as their current context. The nature of notifications is manifold, applications use them both sparsely and frequently. In this paper we present the first large-scale analysis of mobile notifications with a focus on users’ subjective perceptions. We derive a holistic picture of notifications on mobile phones by collecting close to 200 million notifications from more than 40,000 users. Using a data-driven approach, we break down what users like and dislike about notifications. Our results reveal differences in importance of notifications and how users value notifications from messaging apps as well as notifications that include information about people and events. Based on these results we derive a number of findings about the nature of notifications and guidelines to effectively use them.
Titles can alter the comprehension of a text by affecting the selection of information from a text and the organization of this information in memory. Text comprehension is assumed to involve an organizational process that results in the formation of a text base, an ordered list of semantic units-propositions. The text base can be used as a retrieval scheme to reconstruct the text. Procedures for assigning propositions as more relevant to some themes as compared to other themes are developed and applied to texts. Texts with biasing titles were used in an experiment to demonstrate that immediate free recall is biased toward the theme emphasized in the title. The comprehension process which is guided by the text's thematical information is described.
Confidence judgments for eyewitness identifications play an integral role in determining guilt during legal proceedings. Past research has shown that confidence in positive identifications is strongly associated with accuracy. Using a standard lineup recognition paradigm, we investigated accuracy using signal detection and ROC analyses, along with the tendency to choose a face with both simultaneous and sequential lineups. We replicated past findings of reduced rates of choosing with sequential as compared to simultaneous lineups, but notably found an accuracy advantage in favor of simultaneous lineups. Moreover, our analysis of the confidence-accuracy relationship revealed two key findings. First, we observed a sequential mistaken identification overconfidence effect: despite an overall reduction in false alarms, confidence for false alarms that did occur was higher with sequential lineups than with simultaneous lineups, with no differences in confidence for correct identifications. This sequential mistaken identification overconfidence effect is an expected byproduct of the use of a more conservative identification criterion with sequential than with simultaneous lineups. Second, we found a steady drop in confidence for mistaken identifications (i.e., foil identifications and false alarms) from the first to the last face in sequential lineups, whereas confidence in and accuracy of correct identifications remained relatively stable. Overall, we observed that sequential lineups are both less accurate and produce higher confidence false identifications than do simultaneous lineups. Given the increasing prominence of sequential lineups in our legal system, our data argue for increased scrutiny and possibly a wholesale reevaluation of this lineup format. (PsycINFO Database Record (c) 2013 APA, all rights reserved).
Past research has suggested that familiarity with a message, brought about by repetition, can increase (Cacioppo & Petty, 1989) or decrease (Garcia-Marques & Mackie, 2001) analytic (systematic) processing of that message. Two experiments attempted to resolve these contradictory findings by examining how personal relevance may moderate the impact of familiarity on processing. Experiment 1 manipulated repetition and personal relevance and found that message repetition increased analytic processing (as reflected by greater persuasion following strong vs. weak arguments) under high relevance conditions and decreased analytic processing when relevance was low. In Experiment 2, both repetition and relevance were manipulated in different ways, but results again showed that repetition reduced analytic processing under low relevance conditions and that perceived familiarity mediated this outcome. Implications of these findings are discussed.
Although the mere exposure effect has been researched widely, surprisingly little is known about the attitudinal and cognitive effects of message repetition. It was hypothesized that the sequence of topic-relevant thoughts generated in response to a (repeated) persuasive message would parallel attitude change. To test this prediction, 2 experiments were conducted. In Exp I, 133 undergraduates heard a communication either 0 (control), 1, 3, or 5 times in succession, rated their agreement with the advocated position, and listed the message arguments they could recall. In Exp II, 193 undergraduates heard a communication either 1, 3, or 5 times, rated their agreement, listed their thoughts, and listed the message arguments they could recall. In both experiments, agreement first increased, then decreased as exposure frequency increased (regardless of the position advocated), but agreement was unrelated to the recall of the message arguments. In Exp II, analyses of the listed thoughts revealed that counterargumentation decreased, then increased, whereas topic-irrelevant thinking increased as exposure frequency increased; as expected, only topic-relevant thoughts were related to agreement. Results are interpreted in terms of an attitude-modification model in which repetition and content of a persuasive advocacy affect the type and number of thoughts generated; these thoughts, in turn, affect the attitudinal reaction to the advocacy. (63 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
A review and meta-analysis of methodological and subject variables influencing the exposure–affect relationship was performed on studies of the mere exposure effect published in the 20 years following R. B. Zajonc's (see record
1968-12019-001) seminal monograph. Stimulus type, stimulus complexity, presentation sequence, exposure duration, stimulus recognition, age of subject, delay between exposure and ratings, and maximum number of stimulus presentations all influence the magnitude of the exposure effect. Implications of these findings are discussed in the context of previous reviews of the literature on exposure effects and with respect to prevailing theoretical models of the exposure–affect relationship. Modifications of the 2-factor model of exposure effects that increase the heuristic value of the model are described. A possible evolutionary basis of the exposure effect is discussed. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Three experiments investigating the role of boredom as a limiting condition on R. B. Zajonc's (1968) mere exposure effect are described. In Experiment 1, non-boredom-prone Ss showed significant exposure effects for Welsh figure stimuli, whereas boredom-prone Ss showed no exposure effects at all for these stimuli. In Experiments 2 and 3, complex stimuli (line-drawn optical illusions) produced significantly stronger exposure effects than relatively simple stimuli (Welsh figures). The difference in affect ratings for optical illusion vs. Welsh figure stimuli was greater when Ss rated both types of stimuli (Experiment 2) than when Ss rated only 1 type of stimulus (Experiment 3). Furthermore, Welsh figures showed a decline in affect ratings with increasing exposure frequency in Experiment 2 and an increase in affect ratings with increasing exposure frequency in Experiment 3, suggesting that stimulus "contrast" effects are important in determining affect judgments in mere exposure experiments. Results support the role of boredom as a limiting condition on the mere exposure effect and are consistent with a 2-factor learning-satiation model of the exposure effect. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
We investigated memories of room-sized spatial layouts learned by sequentially or simultaneously viewing objects from a stationary position. In three experiments, sequential viewing (one or two objects at a time) yielded subsequent memory performance that was equivalent or superior to simultaneous viewing of all objects, even though sequential viewing lacked direct access to the entire layout. This finding was replicated by replacing sequential viewing with directed viewing in which all objects were presented simultaneously and participants' attention was externally focused on each object sequentially, indicating that the advantage of sequential viewing over simultaneous viewing may have originated from focal attention to individual object locations. These results suggest that memory representation of object-to-object relations can be constructed efficiently by encoding each object location separately, when those locations are defined within a single spatial reference system. These findings highlight the importance of considering object presentation procedures when studying spatial learning mechanisms.
A coherent text normally requires the reader to construct a sense of the total text. So we expected a thematic title to relieve the reader of most of this task. Experiment 1 confirmed this idea by showing that the thematic title significantly increased free recall if the text structure was regular or slightly disturbed, but did not affect recall of an unstructured text. Experiment 2 showed that prolonged reading time allowed the thematic title to raise free recall of a text with random structure. Furthermore, the two experiments demonstrated the comprehensibility ratings to be affected by the text structure and the reading time, but not by the title. Thus, comprehensibility ratings do not seem to be interchangeable with free recall.
Subjects rated how certain they were that each of 60 statements was true or false. The statements were sampled from areas of knowledge including politics, sports, and the arts, and were plausible but unlikely to be specifically known by most college students. Subjects gave ratings on three successive occasions at 2-week intervals. Embedded in the list were a critical set of statements that were either repeated across the sessions or were not repeated. For both true and false statements, there was a significant increase in the validity judgments for the repeated statements and no change in the validity judgments for the non-repeated statements. Frequency of occurrence is apparently a criterion used to establish the referential validity of plausible statements.
This study conducts two experiments to examine how investors’ judgments differ when they read a press release using either a mobile device or a computer. Results show that when investors use a mobile device, information related to a specific headline (mentioning a specific part of the news like “net income” or “revenue”) influences their investment judgments more than when investors use a computer. This effect is robust to specific headlines that focus on either positive or negative information. In contrast, investors’ judgments do not differ when they use a mobile device compared to a computer and the headline is general (using the broad term “results”). We replicate our findings in a second experiment and provide evidence that the observed effect occurs because investors who use their mobile device are in a more distracted frame of mind, which in turn increases the influence of prominent information. Our results suggest that managers’ presentation choices may have a greater influence on investors as they increasingly rely on mobile devices to research and execute investment decisions.
We examine how information dissemination via mobile device applications (apps) affects nonprofessional investors' judgments. In response to the prevalence of mobile device use, the media ungroups content into smaller pieces to accommodate users, and apps use push notifications to highlight this content. These changes increase users' ability to access investment information in real time, leaving some investors feeling as if they are missing out if they are not continuously connected. We validate a scale to capture investors' fear of missing out on investment information (I-FoMO) and document that I-FoMO is distinct from traditional FoMO that occurs in social settings. Then, using an experiment, we find that receiving ungrouped content via a mobile device has a greater effect on investment allocations in the presence, rather than absence, of push notifications. Further, we find that these results hold for higher, but not for lower, I-FoMO investors.
JEL Classifications: G23; M41; M48; M49.
Data Availability: Contact the authors.
We experimentally investigate how jargon affects investment willingness for investors with different industry knowledge, and whether such effects vary with good or bad jargon. We find that for investors without industry knowledge, jargon decreases investment willingness because it decreases understanding. However, for investors with some but low industry knowledge, jargon increases investment willingness because it increases perceived product premium. Such effects exist whether good or bad jargon is used. Finally, investors with high industry knowledge differentiate between good and bad jargon, and reduce investment willingness only when bad jargon is used. These findings have implications for regulators, managers, and investors.
This paper provides new evidence that investor attention explains positive returns around earnings announcements and reconciles the attention explanation with information-based explanations in the literature. I use earnings notifications, which are attention-grabbing announcements of the upcoming earnings date but otherwise provide little new information. I find positive returns, more EDGAR searches, and higher trading volumes on notification days. I also find that attention and returns around the earnings announcement are lower in the presence of notifications, consistent with notifications attenuating investor attention. I show that attention has its strongest effect on returns in the days immediately following the earnings announcement.
We examine how CEOs can facilitate the development of investor trust that helps mitigate the effects of negative information. Results from an experiment show that investors trust the CEO more and are more willing to invest in the firm when the CEO communicates firm news followed by a negative earnings surprise through a personal Twitter account than when the news and surprise comes from the CEO via a website or from the firm's Investor Relations Twitter account or website. A follow‐up experiment shows that repeating the negative news does not incrementally affect investors who received the news from the CEO's Twitter account, but does further negatively impact investors who received the news via other disclosure mediums, especially those who received the news via the Investor Relations Twitter account. Our results have implications for firms and executives considering the costs and benefits of communicating with investors via Twitter.
This article is protected by copyright. All rights reserved
Contrast analysis has become prevalent in experimental accounting research since Buckless and Ravenscroft (1990) introduced it to the accounting literature over 25 years ago. Since its initial introduction, the scope of contrast testing has expanded, yet guidance as to the most appropriate methods of specifying, conducting, interpreting, and exhibiting these tests has not. We survey the use of contrast analysis in the recent literature and propose a three-part testing approach that provides a more comprehensive picture of contrast results. Our approach considers three pieces of complementary evidence: the visual evaluation of fit, traditional significance testing, and quantitative evaluation of the contrast variance residual. Our measure of the contrast variance residual, q², is proposed for the first time in this work. After proposing our approach, we walk through six common contrast testing scenarios where current practices may fall short and our approach may guide researchers. We extend Buckless and Ravenscroft (1990) and contribute to the accounting research methods literature by documenting current contrast analysis practices that result in elevated Type I error and by proposing a potential solution to mitigate these concerns.
Online labor markets allow rapid recruitment of large numbers of workers for very low pay. Although online workers are often used as research participants, there is little evidence that they are motivated to make costly choices to forgo wealth or leisure that are often central to addressing accounting research questions. Thus, we investigate the validity of using online workers as a proxy for non-experts when accounting research designs use more demanding tasks than these workers typically complete. Three experiments examine the costly choices of online workers relative to student research participants. We find that online workers are at least as willing as students to make costly choices, even at significantly lower wages. We also find that online workers are sensitive to performance-based wages, which are just as effective in inducing high effort as high fixed wages. We discuss implications of our results for conducting accounting research with online workers.
Data Availability: Contact the authors.
An enduring issue in financial reporting is whether and how salient summary measures of firm performance (“earnings metrics”) affect market price efficiency. In laboratory markets, we test the effects of salient earnings metrics, which vary in how they combine persistent and transitory elements, on investor information search, beliefs about value, offers to trade, and market price efficiency. We find that including transitory elements in salient earnings metrics causes traders to search unnecessarily for further information about these elements and to overestimate their effect on fundamental value relative to a rational benchmark. In contrast, separately displaying persistent elements in earnings increases the accuracy of traders’ value estimates. Prices generally reflect traders’ beliefs about value, and prices are most efficient when transitory elements are excluded from earnings metrics entirely. Our study contributes to research on salience effects in financial reporting by showing that including transitory elements in salient earnings metrics causes inefficient information search and biased beliefs about value that can aggregate to affect market prices. We also contribute to research in experimental markets by showing that redundant disclosure is not always beneficial; redundant disclosure of transitory earnings elements, in particular, appears to have negative consequences for investor behavior and market efficiency.This article is protected by copyright. All rights reserved.
Recent studies document that market participants react positively to the positive language sentiment or tone embedded in financial disclosures, and that investors’ reactions to negative news are more muted with poor disclosure readability. However, while language sentiment and readability co-occur in practice, their joint effects remain largely unexplored. In an experiment with MBA students as participants, we investigate how the effect of language sentiment varies with readability and investor sophistication level. We find that language sentiment influences investors’ judgments when readability is low, but not when readability is high. Specifically, when readability is low, disclosures couched in positive language lead to higher earnings judgments for less sophisticated investors, but lower earnings judgments for more sophisticated investors. These findings show that the main effects of readability and language sentiment documented in prior studies have boundary effects, and may reverse when both variables are jointly considered along with investor sophistication. This article is protected by copyright. All rights reserved
To curb opportunism in financial reporting, researchers and regulators have proposed that firms be required to report reconciliations of prior year estimates. We provide experimental evidence that such disclosures are not sufficient for nonprofessional investors to identify firms that are opportunistic in their estimates. We also offer evidence suggesting that the value of these disclosures can be enhanced when nonprofessional investors seek out information about the estimate accuracy of other firms in the industry (i.e., consensus information). Our study provides insights about these disclosures and the mechanisms that enhance their effectiveness. Our findings have broad implications for standard-setters and future research designed to assist in identifying opportunistic management behavior.
Two experiments demonstrated that a subjective feeling of familiarity determined whether participants processed persuasive information analytically (systematically) or non-analytically (heuristically). In the first experiment, individuals unfamiliar with message content showed differential attitude change when strong versus weak arguments were presented, whereas individuals made familiar with the message through unrelated repetition failed to do so. These results were confirmed in a second study that manipulated familiarity through subtle repetition and eliminated procedural priming explanations of the effect. Implications of these findings for familiarity as a regulator of persuasive processing are discussed.
A study of reactions to a novel product attributed the invention to either an expert or a novice. Comprehension of the product description was manipulated by varying information exposure time (Study 1) and contextual prior knowledge (Study 2). As predicted by the heuristic-systematic model, comprehensibility moderated the persuasive impact of source expertise. When comprehension was low, subjects relied on the inventor's expertise in forming their attitudes toward the product, but when comprehension and, hence, systematic processing were higher, source expertise had no impact on subjects' attitudes. In a pilot study, however, subjects attributed comprehensibility to the source and derogated incomprehensible communications.
Accounting decisions often involve similar types of judgments regarding different clients, projects, or employees. These tasks may use similar information items and be performed within the same work session. While independent consideration of the information for each respective decision may be desired, psychology research on contrast effects suggests that the information from a previous decision may be retained and compared to the information provided for a current judgment. Such contrast effects are potentially critical to accounting judgments because they suggest that the information associated with a given decision task will be evaluated differently depending on the nature of the prior contextual information. Using a multi-client audit context, we find that auditors are susceptible to contrast effects such that their judgments on a current client are influenced by their exposure to similar judgment information on a prior client. We also extend prior psychology and accounting research by examining and finding that for a current client, the magnitude of the contrast effect from an initial judgment task cascades to influence indirectly related subsequent judgment tasks for which no information from the prior client is available for comparison. We also find auditors' documentations of evidence are systematically affected by the contrast and cascading of contrast effects. Thus, our results provide support for contrast effects and, most important, the cascading of contrast effects to subsequent decisions.
Past studies of narrative text characteristics mainly focused on comprehension and memory of the contents stated explicitly, but not thematic inference. Two experiments were conducted to examine the effects of the characteristics of narrative text on generation of thematic inference. In Experiment 1, a self-paced reading method demonstrated that an appropriate title facilitated comprehension of the theme of a text. In Experiment 2, the same titles for the texts were used, together with variation in the goal of the protagonist and outcome of the story. Results indicated that generation of thematic inference depended on the interaction between the goal of the protagonist and the final outcome of a text. These findings are consistent with the global coherence assumption of contemporary text-processing models in which the overarching theme is constructed during reading by integrating the title, the statements about the goal of the protagonist and the final outcome of a text.
This study investigates how investors’ reactions to one firm’s earnings preannouncements are affected by the preannouncements of a peer firm. Our experimental results suggest that when two peer firms sequentially preannounce positive earnings news, investors’ assessments of the target firm’s one-year-ahead earnings per share (EPS) are affected by the peer firm’s preannouncing behaviors. We find that in such environments, preannouncing 50 percent of the positive news is not the best strategy for maximizing investors’ earnings predictions. Instead, we find that when differences exist in the two firms’ earnings preannouncements, contrast effects dominate investors’ predictions such that the greater the portion of the positive surprise preannounced by the target relative to the peer firm, the greater is the one-year-ahead EPS prediction for the target firm. However, when no differences exist between the surprises preannounced by the two firms, investors provide the highest one-year-ahead EPS forecast for the target firm when it follows the strategy of preannouncing 50 percent of the total earnings surprise. These findings suggest that investors’ reactions to earnings preannouncements are a complex function of the contrasts between the target’s preannouncements and those of its peers. Thus, they imply that the role of a target firm’s preannouncements on investors’ EPS predictions cannot be determined in isolation. Instead, the extent and nature of the preannouncements of peer firms must be considered in any such analyses. These findings have important implications for managers who make preannouncement decisions and academics examining market reactions to voluntary management disclosures.
We investigate analysts? reactions to qualitative warnings of adverse earnings, and attempt to reconcile analysts? more negative forecast revisions, as documented in previous research, and the apparently conflicting anecdotal evidence that suggests more positive responses to firms that warn. We conjecture that the inconsistency arises because warnings cause analysts to revise their earnings forecasts sequentially in response to two related signals (the warning and the earnings announcement). However, their responses to retrospective questions about the effects of warnings are the result of a simultaneous response to both signals. In our experiment, 28 financial analysts predicted future years? earnings in one of three conditions. Consistent with the anecdotal evidence suggesting that analysts evaluate warnings positively, analysts who simultaneously evaluated a warning and a later earnings announcement (the Simultaneous warning condition) forecasted higher future earnings than analysts who received no warning (the No Warning condition). However, analysts who first revised their forecasts based on the warning and then made a second revision based on the later earnings announcement (our Sequential warning condition) forecasted much lower future earnings than those in the Simultaneous warning condition, and slightly lower future earnings than in the No warning condition. This suggests that the act of sequential processing contributes to analysts more negative forecasts documented in previous archival research. Taken together, these results suggest that the positive impact of analysts' stated beliefs about firms that warn (as reflected in their responses to reporters? retrospective questions) are more than offset by the effects of sequentially processing a warning followed by an earnings announcement.
This paper examines the relation between annual report readability and firm performance and earnings persistence. I measure the readability of public company annual reports using the Fog index from the computational linguistics literature and the length of the document. I find that: (1) the annual reports of firms with lower earnings are harder to read (i.e., they have a higher Fog index and are longer); and (2) firms with annual reports that are easier to read have more persistent positive earnings.
This paper models firms’ choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.
Managers often provide self-serving disclosures that blame poor financial performance on temporary external factors. Results of an experiment conducted with 124 financial analysts suggest that when analysts perceive such disclosures as plausible, they provide higher earnings forecasts and stock valuations than if the explanation had not been provided. However, we also show that these disclosures can backfire if analysts find them implausible. Specifically, implausible explanations that blame poor performance on temporary external factors lead analysts to provide lower earnings forecasts and assess a higher cost of capital than if the explanation had not been provided.
Two experiments show that repeated exposure to information about a target person reduces individuation and thereby increases stereotyping of the target person based on social group memberships. The effect is not due to familiarity-induced liking (the mere exposure effect), nor is it mediated by increased accessibility of the target’s social category, nor by increases in perceived social judgeability. The results are most consistent with the use of feelings of familiarity as a regulator of processing mode, such that familiar objects receive less systematic or analytic processing. In everyday life, frequent exposure to another person ordinarily produces not only familiarity but also liking, individuated knowledge, and friendship, factors that may effectively limit stereotyping. But when previous exposure is unconfounded from these other factors, its effect can be to increase stereotyping.
This paper uses recent experimental studies of financial accounting to illustrate our view of how such experiments can be conducted successfully. Rather than provide an exhaustive review of the literature, we focus on how particular examples illustrate successful use of experiments to determine how, when and (ultimately) why important features of financial accounting settings influence behavior. We first describe how changes in views of market efficiency, reliance on the experimentalist’s comparative advantage, new theories, and a focus on key institutional features have allowed researchers to overcome the criticisms of earlier financial accounting experiments. We then describe how specific streams of experimental financial accounting research have addressed questions about financial communication between managers, auditors, information intermediaries, and investors, and indicate how future research can extend those streams. We focus particularly on (1) how managers and auditors report information; (2) how users of financial information interpret those reports; (3) how individual decisions affect market behavior; and (4) how strategic interactions between information reporters and users can affect market outcomes. Our examples include and integrate experiments that fall into both the “behavioral” and “experimental economics” literatures in accounting. Finally, we discuss how experiments can be designed to be both effective and efficient.
This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness,
which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process
B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a
class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical
prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead
to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could
improve judgements and decisions in situations of uncertainty.
We examined determinants of subjective framing other than semantic manipulation. Participants in the first experiment (n= 176) read several business threats or opportunities, prior to describing a strategic issue. Results revealed a contrast effect, where those exposed to unequivocal opportunities framed an equivocal issue as a threat, whereas those exposed to unequivocal threats did not view the same issue as threatening. A second experiment (n= 185) replicated the contrast effect using only one context manipulation (i.e., threat or opportunity business scenario), and alternative modes of presentation (i.e., serial vs simultaneous). A third experiment (n= 72) showed that the contrast effects extended beyond simple perceptions to actual intentions and behaviors. We conclude that the narrowing of one's frame for a strategic issue may result in a restricted range of alternatives considered and suboptimal responses.
Judgment effects of familiarity with an analyst's name. Accounting
- W Chen
Are investors influenced by pro forma emphasis and reconciliations in earnings announcements?
- W B Elliott
The role of dissemination in market liquidity: Evidence from firms' use of Twitter TM
- E Blankespoor
Emphasis on pro forma versus GAAP earnings in quarterly press releases: Determinants, SEC intervention, and market reactions
- R M Bowen