Search

Advisors frequently have an interest in the decisions their advisees make, forcing advisees to distinguish their advisors' unbiased beliefs from their self-interested bias. This task is likely to be especially hard when psychological forces distort advisors' beliefs to make some of their bias sincerely held. In our first experiment, we show that advisors bias both their recommendations and their own actions toward their persuasion goal, and that advisees are better at distinguishing between the unbiased, sincerely biased, and insincerely biased parts of their advisor's recommendation when they meet face-to-face to discuss, compared with when they receive only a written recommendation. Our second experiment shows that advisees distinguish their advisor's bias from their advisor's unbiased beliefs more accurately when the advisors are asked to provide fact-based information about their own actions. Both experiments show that post-report interactions are more helpful for identifying insincere bias than sincere bias. Data Availability: All raw data (excluding identifiable information), data processing code for tabulated analyses, and full experimental materials are available from the authors.

We provide evidence that credit investors do not fully impound the implications of firms' cost structure (or operating leverage) when pricing credit default swaps. Information about firms' cost structure is not disclosed and needs to be estimated. Furthermore, the performance implications of firms' cost structure depend on the expected macroeconomic conditions. We focus on the debt market because of the strong emphasis of this market on downside risk. To measure expected aggregate macroeconomic conditions, we employ the change in the anxious index (AI), which is the probability of a decline in real GDP provided by the SPF—the survey of professional forecasters. We find that the interaction between the firm's cost structure and change in AI predicts one-quarter-ahead CDS spreads. Portfolio-level analysis confirms this result. JEL Classifications: G12; G14; G32.

We present 179 investment professionals with a scenario that manipulates whether a male or female analyst persists in pitching a stock pick after it has been voted down. Respondents evaluate analysts as less promotable when they do not persist, but only if the analyst is female. Results are consistent with categorization theory, which suggests that evaluators rely on stereotypes to interpret unexpected behaviors. In male-dominated settings, the same unexpected behavior may be perceived as evidence of a “lack of fit” in evaluations of women, but nondiagnostic in evaluations of men. Analysis of free-response questions confirm that the unexpected behavior was a predominant focus in performance evaluations of women, but not for men. Semi-structured interviews with 13 senior investment professionals provide additional support for the role of expectations and categorization heuristics on promotion decisions. Our findings shed light on factors that may contribute to the investment industry's “leaky pipeline” for women. JEL Classifications: M40; M41; M49; M51. Data Availability: Contact the authors.

I define moral accounting as the crafting of accountability systems that improve moral performance in a moral way. I also propose that accountants are well-positioned to offer Moral Accounting Engagements (MAEs), which evaluate how a client’s systems fall short of moral accounting’s aspirations and advise them on how they can address any shortcomings. I offer a conceptual framework that leaves controversial moral standards in the hands of those with the philosophical, civic or theological expertise to earn moral authority, but requires accountants to structure those standards to make MAEs a feasible endeavor that ties closely to traditional accounting engagements both conceptually and procedurally. Conceptually, moral accounting views people as stewards acting on behalf of society, just as traditional accounting views managers as stewards acting on behalf of owners. Procedurally, an MAE involves gathering objective data on accountability systems, capturing the performance of entities using double-entry bookkeeping, and evaluating systems and performance in light of existing standards. I also offer a set of Moral Accounting Principles (the MAP) that are moral analogs of longstanding principles in traditional accounting, and that guide the accountant’s evaluation of the client. I close by sketching directions for future research.

This book is an expanded version of "How to be a Good Professor", which was originally written for those who are or want to be professors. This revision is intended for a more general (and especially professional) audience, because almost everyone faces the professor’s challenges: how to use our expertise and insight to provide innovative and justifiable answers to worthwhile questions; how to convey what we know clearly, honestly and persuasively; how to evaluate what others claim to know with a skeptical eye; how to offer and receive criticism diplomatically and constructively; and how to use all of these skills to improve our own organizations and society at large. I hope this book will bring out the good professor in all of us.

This guide is intended to help you move traditional face-to-face courses online quickly. It starts with four general points: start by planning to teach as you normally do, make tweaks to maintain or enhance your interaction with students, remember to communicate to your students that you care about them, and invite guests to help you teach. The guide then walks through some useful approaches to synchronous classes, asynchronous instruction, and assessment. The guide assumes teachers and students are using Zoom and Canvas, but because it is focused more on teaching than technology, most of the lessons apply to other platforms.

People who use venues for productive conversations impose norms (“LAAPs”) encouraging statements that are meaningful, relevant, honest, understandable, diplomatic, engaging, helpful, and supportive of the long-term success of the venue. Statements that undermine productivity by falling short on some of these characteristics without sufficient strength on others are excluded, policed and punished as “crebit”. I describe a variety of LAAPs and their crebit, use the framework to offer testable predictions about when speech will be punished as crebit, and propose some exclusions that would allow more productive conversations online and about the limits of speech on campus.

The papers in this volume were published through a Registration‐based Editorial Process (REP). Authors submitted proposals to gather and analyze data; successful proposals were guaranteed publication as long as the authors lived up to their commitments, regardless of whether results supported their predictions. To understand how REP differs from the Traditional Editorial Process (TEP), we analyze the papers themselves; conference comments; a survey of conference authors, reviewers, and attendees; and a survey of authors who have successfully published under TEP. We find that REP increases up‐front investment in planning, data gathering, and analysis, but reduces follow‐up investment after results are known. This shift in investment makes individual results more reproducible, but leaves articles less thorough and refined. REP could be improved by encouraging selected forms of follow‐up investment that survey respondents believe are usually used under TEP to make papers more informative, focused, and accurate at little risk of overstatement.

Accounting journals rarely publish articles explicitly focused on re-examining prior claims. Such articles allow accounting scholars to establish the validity and generality of claims that are or might become influential in our field. However, the professional benefits of revisiting claims are often believed to be outweighed by its costs, especially for junior scholars. This document explains how pre-registered re-examination proposals (p-rex), such as those recently solicited by Journal of Financial Reporting, enhance the net professional benefits of publishing re-examinations, and offers suggestions on how faculty can integrate p-rex proposals into their doctoral seminars.

francaisPourquoi l'incapacite des marches faiblement reglementes a atteindre les objectifs de la SEC en matiere de qualite du marche ne doit-elle plus nous etonner : analyse d'« Innovation d'un intermediaire prive et liquidite du marche » La SEC a pour objectifs declares de proteger les investisseurs, de maintenir des marches ordonnes et de faciliter la formation de capital. Une faible reglementation suffit a l'atteinte de ces objectifs si, comme le suppose la theorie economique traditionnelle, les investisseurs traitent l'information a peu de frais et se protegent des desavantages lies a l'information, et si les societes equilibrent de facon optimale les couts et les avantages de leur engagement a produire des rapports fiables. De plus en plus d'etudes montrent qu'une faible reglementation ne permet pas l'atteinte des objectifs de la SEC, les investisseurs jugeant le traitement de l'information couteux et ne se protegeant pas. Ayant examine la theorie et les resultats des recherches menees jusqu'ici, l'auteur traite des nouvelles lecons tirees de l'etude de Jiang, Petroni et Wang (2016) indiquant que les Pink Sheets® ont reduit la liquidite des societes dont la qualite de l'information est faible et accru la liquidite de celles dont la qualite de l'information est elevee, en faisant simplement ressortir la qualite de l'information publiee par les societes cotees repertoriees sous Pink Sheets®. Bien que l'innovation Pink Sheets® ait pu emprunter diverses voies causales, elle entraine invariablement une transgression des principes d'economie de traitement et d'autoprotection et mene a la conclusion que ce marche faiblement reglemente n'a pas satisfait aux objectifs declares de la SEC, au depart. L'auteur allegue en conclusion que les marches ne peuvent atteindre les objectifs de la SEC que s'ils affichent une version particulierement forte de l'efficience « dynamique », ce qui exige que chaque operation particuliere s'orientant vers une revelation meme incomplete s'effectue au prix optimal du moment. L'efficience dynamique etant peu probable, nous ne devrions plus nous etonner, affirme l'auteur, que les marches faiblement reglementes ne comblent pas les attentes a certains egards importants. Il conviendrait plutot de miser sur notre profonde comprehension de l'inefficience des marches pour orienter la reglementation. (French) [ABSTRACT FROM AUTHOR] EnglishThe stated goals of the SEC are to protect investors, maintain orderly markets and facilitate capital formation. These goals can be achieved with very light regulation if, as assumed by traditional economic theory, investors process information costlessly and protect themselves from informational disadvantages, and firms optimally balance the costs and benefits of committing to make their reports reliable. A growing body of research demonstrates that light regulation fails to achieve the SEC's goals, because investors find information processing costly and fail to protect themselves. After reviewing theory and prior evidence, I discuss new lessons learned from Jiang, Petroni, and Wang (), who show that Pink Sheets® reduced the liquidity of firms with low reporting quality and increased the liquidity of firms with high reporting quality, merely by highlighting the quality of their listed firms' disclosure. While the Pink Sheets® innovation might have occurred through many causal channels, all of them entail a violation of costless processing and self-protection, and lead to the conclusion that this lightly regulated market did not initially meet the stated goals of the SEC. I conclude by arguing that markets can achieve the SEC's goals only if they exhibit a particularly strong version of 'dynamic' market efficiency, which requires that each individual trade on the path to even incomplete revelation occurs at the then-optimal price. Because dynamic efficiency is unlikely, we should stop being surprised to see evidence that lightly regulated markets fall short on key dimensions. Instead, we should use our well-developed understanding of market inefficiency to guide regulation. (English) [ABSTRACT FROM AUTHOR]

In the published proceedings of the first Journal of Accounting Research Conference, Vatter [1966] lamented that “Gathering direct and original facts is a tedious and difficult task, and it is not surprising that such work is avoided.” For the fiftieth JAR Conference, we introduce a framework to help researchers understand the complementary value of seven empirical methods that gather data in different ways: prestructured archives, unstructured (“hand-collected”) archives, field studies, field experiments, surveys, laboratory studies, and laboratory experiments. The framework spells out five goals of an empirical literature and defines the seven methods according to researchers’ choices with respect to five data gathering tasks. We use the framework and examples of successful research studies in the financial reporting literature to clarify how data gathering choices affect a study's ability to achieve its goals, and conclude by showing how the complementary nature of different methods allows researchers to build a literature more effectively than they could with less diverse approaches to gathering data.

The papers in this volume were published through a registration-based Editorial Process (REP). Authors submitted proposals to gather and analyze data; successful proposals were guaranteed publication as long as the authors lived up to their commitments, regardless of whether results supported their predictions. To understand how REP differs from the Traditional Editorial Process (TEP), we analyze the papers themselves; conference comments; a survey of conference authors, reviewers, and attendees; and a survey of authors who have successfully published under TEP. We find that REP increases up-front investment in planning, data gathering, and analysis, but reduces follow-up investment after results are known. This shift in investment makes individual results more reproducible, but leaves articles less thorough and refined. REP could be improved by encouraging selected forms of follow-up investment that survey respondents believe are usually used under TEP to make papers more informative, focused, and accurate at little risk of overstatement.

This document includes the complete set of free-text responses to our survey on the 2017 Journal of Accounting Research Conference, Registered Reports of Empirical Research. We solicited responses from all authors who have published in six well-regarded accounting journals over the last decade. Respondents provide thoughts on how research quality is affected by authors’ discretion to choose: which measures and analyses to report; whether or not to report a sample or subsample; which observations to exclude from primary analyses; whether to gather additional data after observing results; to change their predictions and/or underlying theory; and to choose not to report or highlight hypotheses. Respondents also provide first-hand accounts of discretionary choices and failed replications, advice to editors and reviewers, and their thoughts on other forms of discretion, motivations for using discretion, and any insights they wish to share not covered by their previous answers.

We present 179 investment professionals with a scenario that manipulates whether a male or female analyst persists in pitching a stock pick after it has been voted down. Respondents evaluate analysts as less promotable when they do not persist, but only if the analyst is female. Results are consistent with categorization theory, which suggests evaluators rely on stereotypes to interpret unexpected behaviors. In male-dominated settings, the same unexpected behavior may be perceived as evidence of a “lack of fit” in evaluations of women, but nondiagnostic in evaluations of men. Analysis of free-response questions confirm that the unexpected behavior was a predominant focus in performance evaluations of women, but not for men. Semi-structured interviews with 13 senior investment professionals provide additional support for the role of expectations and categorization heuristics on promotion decisions. Our findings shed light on factors that may contribute to the investment industry’s “leaky pipeline” for women.

Taylor and Verrecchia (2015) show that idiosyncratic risk can be priced in efficient but imperfectly competitive equity markets. We discuss how the model is structured, how it might apply to the pricing of financial reporting quality, and how empiricists might test its predictions.

Using a laboratory market, we investigate how the ability to hide orders affects traders’ strategies and market outcomes in a limit order book environment. We find that order strategies are greatly affected by allowing hidden liquidity, with traders substituting nondisplayed for displayed shares and changing the aggressiveness of their trading. As traders adapt their behavior to the different opacity regimes, however, most aggregate market outcomes (such as liquidity and informational efficiency) are not affected as much. We also find that opacity appears to increase the profits of informed traders but only when their private information is very valuable

We provide evidence that credit investors do not fully impound the implications of firms’ cost structure (or operating leverage) when pricing credit default swaps. Information about firms’ cost structure is not disclosed and needs to be estimated. Furthermore, the performance implications of firms’ cost structure depend on the expected macroeconomic conditions. We focus on the debt market because of the strong emphasis of this market on downside risk. To measure expected aggregate macroeconomic conditions, we employ the change in the anxious index (AI), which is the probability of a decline in real GDP provided by the SPF—the survey of professional forecasters. We find that the interaction between the firm’s cost structure and change in AI predicts one-quarter-ahead CDS spreads. Portfolio-level analysis confirms this result.

Management reporting systems are like power tools. They help you improve performance quickly and effectively, but one careless moment can cause irreparable damage and serious injury. For years, my students have been asking permission to send this book of best practices and safety tips to colleagues, friends and family. This revision provides a comprehensive introduction to management reporting systems, complete with links to nearly 100 videos, written to be appropriate for students and practitioners of any background, across all areas where people organize their efforts to improve performance. Examples include business, charities, governmental agencies, education, sports, and family life. Each of its 28 essays can be read separately, making the book well-suited to use as supplemental reading.Drawing extensively from current research and classical philosophy, the book encourages both deep skepticism about performance measures and pragmatic recognition of how useful they can be. Thoughtless adherence to performance measures leads many to decry "bean counters," and emphasize that "Not everything that counts can be counted, and not everything that can be counted counts." Yet something gets counted whenever we need to make critical decisions throughout the workplace, politics and daily life.This book will help readers interpret the performance measures generated by the managerial reporting systems most pervasive in modern organizations, design systems that generate more useful measures, and make better use those measures — even though what gets counted often paints a misleading picture of what counts.

We present 60 experienced credit analysts with financial information for two firms: one that mainly outsources production and one that does not. We find that analysts are better able to identify firm characteristics that make an outsourcer more creditworthy when those characteristics are presented in the same general section of a financial report; either on the face of the financial statements or in the footnotes. Such coordinated presentation reduces the cognitive load necessary for integrating the related information and forming a meaningful mental model of each firm. Our results suggest that if standard setters are going to require more detailed disclosures, coordinated presentation of related decision-useful information in the same section of a firm’s financial report may benefit users, regardless of whether the information is recognized on the face of the financial statements or disclosed in the notes. Supplemental analysis cautions standard setters, however, to consider whether requiring more detailed disclosures provides an incremental benefit over how firm’s disclose information today.

Two laboratory experiments on a single-echelon inventory task show that inventory durability interacts with transit lags to create order volatility that exceeds demand volatility. Thus, inventory durability and transit lags cause managers to deviate from inventory decision optimality. Durability creates a large increase in order volatility because players adjust orders insufficiently to reflect current inventory and backlogs, much as they adjust orders insufficiently to reflect holding and backlog costs in newsvendor studies (e.g., Schweitzer and Cachon 2000). Transit lags exacerbate non-optimal ordering by interfering with players' ability to correct prior errors. Our results suggest that non-optimal inventory decisions can be driven by inventory and supply chain characteristics, even in the absence of the coordination and information sharing problems studied by Croson et al. (2005) and Sterman (1989a,b). We also examine the influence of features related to personality. We find little evidence that the interactive effects of durability and transit lags are altered by need for cognition, impulsiveness, or locus of control, suggesting that these features make supply chain management extremely difficult. These results imply that retailers and their upstream partners must consider the characteristics of their product and supply chains when interpreting demand signals received from downstream partners.

The stated goals of the SEC are to protect investors, maintain orderly markets and facilitate capital formation. These goals can be achieved with very light regulation if, as assumed by traditional economic theory, investors process information costlessly and protect themselves from informational disadvantages, and firms optimally balance the costs and benefits of committing to make their reports reliable. A growing body of research demonstrates that light regulation fails to achieve the SEC’s goals, because investors find information processing costly and fail to protect themselves. After reviewing theory and prior evidence, I discuss new lessons learned from Jiang, Petroni and Wang (2015), who show that PinkSheets® reduced the liquidity of firms with low reporting quality and increased the liquidity of firms with high reporting quality, merely by highlighting the quality of their listed firms’ disclosure. While the Pink Sheets® innovation might have occurred through many causal channels, all of them entail a violation of costless processing and self-protection, and lead to the conclusion that this lightly regulated market did not initially meet the stated goals of the SEC. I conclude by arguing that markets can achieve the SEC’s goals only if they exhibit a particularly strong version of “dynamic” market efficiency, which requires that each individual trade on the path to even incomplete revelation occur at the then-optimal price. Because dynamic efficiency is unlikely, we should stop being surprised to see yet more evidence that lightly-regulated markets fall short on key dimensions. Instead, we should use our well-developed understanding of market inefficiency to guide regulation.

SYNOPSIS This paper uses a Pragmatic theory of language (drawn from philosophy and linguistics) to diagnose the causes of excessive financial disclosure and propose a regulatory solution. The diagnosis is that existing disclosure regulations are one sided, effectively encouraging firms to disclose any information that might be relevant, but failing to discourage disclosure of information that adds little to what investors already know. This one-sidedness limits investors' ability to draw inferences that items the firm chooses not to disclose are not newsworthy (an inference Pragmatic theorists call “implicature”). The solution is to encourage or require firms to supplement comprehensive disclosures with an “elevated” disclosure that is brief enough to force firms to be selective in choosing what information to include. Regulations can enhance implicature through rules that prohibit firms from elevating disclosures that are less newsworthy than disclosures that are not elevated.

The International Accounting Standards Board (IASB) and The Financial Accounting Standards Board (FASB) recently issued a joint exposure draft on accounting for leases. This exposure draft seeks to shift lease accounting from an “ownership” model to a “right-to-use” model. Under the current ownership model, leases can be reported on balance sheet (finance leases) if certain tests are met, or off balance sheet (operating leases) if those tests are not met. The new model seeks to report all leases on the balance sheet based on the present value of lease obligations without any bright line tests, and no sharp on or off the balance sheet classifications.We are sympathetic to the standard setters concern that the current lease standard is being manipulated improperly by managers resulting in large amount of debt being reported off balance sheet. We provide a discussion of current lease accounting and the proposed exposure draft. We also comment on five key issues covered by the exposure draft: the definition of a lease, the initial measurement and eventual reassessment at fair values, the accounting for lessors, the impact of lease accounting on recognition and income measurement, and classification of lease accounting elements and their impact on accounting ratios.This comment was developed by the Financial Accounting Standards Committee of the American Accounting Association and does not represent an official position of the American Accounting Association.

SYNOPSIS This paper proposes an accounting for revenues as an alternative to the proposals currently being aired by the FASB and IASB. Existing revenue recognition rules are vague, resulting in messy application, so the Boards are seeking a remedy. However, their proposals replace the traditional criteria—revenue is recognized when it is both “realized or realizable” and “earned”—with similarly vague notions that require both the identification of a “performance obligation” and the “satisfaction” of a performance obligation. Our framework aims for the concreteness that yields practical accounting solutions. It has two features. First, revenue is recognized when a customer makes a payment or a firm commitment to pay. Second, revenue recognition and profit recognition are combined, with profit recognition determined on the basis of objective criteria about the resolution of uncertainty under a contract, and then conservatively so. Two alternative approaches are offered: the complete contract method (where profit is recognized only on the termination of a contract) and the profit margin method (where a profit margin is applied to recognized revenues throughout the contract as the contract profit margin becomes clear. The latter requires resolution of uncertainty, so the completed contract method is the default.

This article examines data on issuer activity and investor returns in the Second Life Capital Exchange (SLCapex), an exchange created and operated by residents of the virtual world Second Life. The exchange is not subject to any rules or regulations other than those imposed by the exchange owners (who themselves are unregulated) and therefore lacks many of the legal and financial reporting institutions common among more familiar exchanges. After describing the structure of the exchange, we evaluate its performance against the three primary goals of the Securities and Exchange Commission (SEC): "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."1 We find evidence that the markets do a poor job of protecting investors from both issuers and large investors. Our results indicate that real-world regulatory, legal, and financial reporting institutions would have helped issuers raise more capital and that individual investors do a poor job of protecting themselves in the absence of such institutions. SLCapex has a number of practices that differ substantially from what we see in real world markets. First, issuers are individual residents of Second Life rather than incorporated

Research in behavioral economics suggests that, in addition to their traditional incentive effects, formal control systems can influence psychological motivations. We extend this literature by demonstrating experimentally that formal controls directly influence people's sense of what behaviors are appropriate in the setting (personal norms), and indirectly alter people's tendency to conform to the behavior of those around them (descriptive norms). These effects persist even after the controls are changed, so that the effects of current controls can be strongly influenced by past control strength. Our results support those who are incorporating psychological factors into principal-agent models (such as Fischer and Huddart [2008]), and suggest that those models should be further modified to incorporate correlations between personal norms and conformity to descriptive norms.

We assess how forms of disagreement among investors affect a firm's cost of capital. Firms experience a lower cost of capital if investors perceive that other investors are ignoring relevant disclosures (perceived errors of omission), but a higher cost of capital if investors perceive that others are responding to irrelevant disclosures (perceived errors of commission). The impact of these two sources of disagreement on the cost of capital is determined by the distribution of opinion and the nature of disclosure. For example, even though aggregated disclosures reveal less to investors, aggregated disclosures may decrease the cost of capital by eliminating disagreement associated with perceived errors of commission. These and additional results arise because the cost of capital is driven not only by investors’ uncertainty about the firm's future earnings performance, but also by investors’ uncertainty about the evolution of beliefs, which partly determines the path of prices.

SYNOPSIS: The FASB and the IASB recently issued a joint discussion paper entitled, Preliminary Views on Revenue Recognition in Contracts with Customers. The boards requested comments on whether their proposed model for revenue recognition would improve the usefulness of the financial statement information for financial decision makers. This paper summarizes the AAA’s Financial Accounting Standards Committee’s responses to several of the boards’ specific questions. We support the boards’ proposed comprehensive revenue recognition standard based on the following options: (1) the customer consideration approach (based on initial contract price measurement); (2) no recognition of revenue at contract inception (by assigning the initial contract price to performance obligations); and (3) allocation of the transaction price to multiple performance obligations based on the relative stand-alone prices of each performance obligation. We also recommend that the boards carefully consider the following clarifications as they develop the final exposure draft. The formal definition should specify that the contract be an “enforceable” agreement. The measurement of a performance obligation must be verifiable. While the transfer of an asset to the customer or the acceptance of a service by the customer normally signals the recognition of revenue, we encourage the boards to carefully consider situations (like long-term construction or mining) when the completion of intermediate performance obligations could trigger revenue recognition prior to the transfer of title. Absent special consideration of these situations, companies may be influenced to write contracts in suboptimal ways in an effort to recognize revenue continuously throughout a long-term construction project or in the process of mining or farming. Finally, we highlight difficulties that may arise in allocating the initial transaction price to multiple performance obligation contracts when the individual performance obligations are not normally sold on a stand-alone basis.

SYNOPSIS: This paper addresses the issues that confront the FASB and IASB in developing a new conceptual framework document. First, we suggest characteristics that a conceptual framework ought to exhibit. Most of these suggestions are based on our critique of the existing framework and the FASB-IASB work in progress. Second, we present a model framework that exhibits these characteristics. We emphasize up front that this framework is quite explicit. It goes to the heart of what a framework document should do: it places specific restrictions on what constitutes admissible accounting standards. The purpose of our effort is to stimulate broad discussion of alternative approaches to foundational documents and to offer a specific example of such an alternative approach.

SYNOPSIS: The Financial Accounting Standards Board (hereafter, FASB) and the International Accounting Standard Board (hereafter, IASB) issued a joint discussion paper titled Preliminary Views on Financial Statement Presentation. The Boards are seeking comments on whether their proposed model for financial statement presentation would improve the usefulness of the financial statement information for financial decision makers. This paper sets forth the American Accounting Association Financial Accounting Standards Committee (hereafter, the committee) summary comments as well as responses to several of the FASB’s and IASB’s (hereafter, jointly mentioned, the Boards) specific objectives and principles-related questions. Overall, the committee believes that the model has several appealing features, but also has several potential problems. Many of the problems discussed related to potential learning impediments for users to adapt to the new presentation format.

SYNOPSIS: The Securities and Exchange Commission (hereafter, SEC) issued a call for comment on a proposal to adopt a roadmap for potential use of international financial reporting standards (hereafter, IFRS) by U.S. companies. We comment on five key issues raised by the SEC proposal. First, we propose that the need for a global regulator is overstated. A global regulator is unlikely to help achieve the stated goals of comparability and consistency of financial reporting on a global basis. We favor allowing U.S. companies to choose use of U.S. GAAP or IFRS rather than mandating one global monopoly set of standards. Second, we agree that the focus on auditing is a very relevant issue that deserves more attention from standard setters. Gains from adopting principles-based accounting standards such as IFRS are likely to be realized only if auditors are also principles-based. Third, while we have serious concerns about governance and financing mechanisms of the International Accounting Standards Board (hereafter, IASB), we recommend that all regulatory actions cannot be held to a standstill while structural changes are made to the IASB. Fourth, we are not in favor of requiring reconciliation schedules from U.S. companies using IFRS. We view such reconciliations as being costly and unnecessary. Fifth, we recommend that the SEC pay more explicit attention to the educational and professional judgment consequences of its proposals.

SYNOPSIS: The SEC has proposed a strategic plan that sets out its mission, vision, and values, four strategic goals, a set of desired outcomes associated with each strategic goal, and a list of performance measures for assessing the SEC’s effectiveness in attaining its goals. We affirm the need for vigorous enforcement of securities law and offer some research-based insights and performance indicators. We also acknowledge the importance of disclosure, but propose that the SEC needs to develop a disclosure framework and develop better operational indicators of quality of disclosure. It is important to appreciate the benefits of disclosure as well as its limits and potential dysfunctional consequences. We also discuss the need for an independent accounting standard setter and recommend that the SEC take a greater role in enhancing the independence of the FASB.

SYNOPSIS: The Canadian Accounting Standards Board (hereafter, AcSB) recently issued an exposure draft to adopt separate GAAP for private enterprises. This new GAAP is justified as being consistent with the current FASB/IASB conceptual framework, but is sensitive to the different cost-benefit considerations facing private entities. We view this proposal as being innovative and responsive to the differential reporting needs of private entities. In this article we explain our reasoning and conclusions on several issues raised by the exposure draft starting with a discussion about the need for a separate conceptual framework for private enterprises. We sketch a preliminary conceptual framework that could be used to develop and justify the type of changes proposed in this exposure draft. We then discuss key issues raised in the exposure draft such as reliance on historical cost as the key basis of measurement, the significant reduction in disclosure requirements for private enterprises, and stopping the emerging issues committee from providing implementation guidance (no EICs). We also comment on the mechanism for financing the standard-setting board, the need to ensure compatibility between accounting and auditing standards, and a process for adjusting the education system to support this new private enterprise GAAP.

Prior research provides only weak and controversial evidence that people overestimate the likelihood of desirable events (wishful thinking), but strong evidence that people bet more heavily on those events (wishful betting). Two experiments show that wishful betting contaminates beliefs in laboratory financial markets because wishful betters appear to possess more favorable information than they actually do. As a consequence, market interaction exacerbates rather than mitigates wishful thinking. This phenomenon, “contagion of wishful thinking,” could be problematic in many settings where people infer others' beliefs from their behavior.

We use a laboratory market to investigate the behavior of noise traders and their impact on the market. Our experiment features informed traders (who possess fundamental information), liquidity traders (who have to trade for exogenous reasons), and noise traders (who do not possess fundamental information and have no exogenous reasons to trade). We find differences in behavior between liquidity traders and noise traders, justifying their separate treatment. We find that noise traders exert some positive effects on market liquidity: volume and depths are higher and spreads are lower. We provide evidence suggesting that the main effect of the liquidity-enhancing trading strategies of the noise traders is to weaken price reversals (decreasing the temporary price impact of market orders) rather than to reduce the permanent price impact of trades (as liquidity traders supposedly do in market microstructure models with information asymmetry). We find that noise traders adversely affect the informational efficiency of the market, but only when the extent of adverse selection is large (i.e., when informed traders have very valuable private information). Finally, we examine how trader behavior and certain market quality measures are affected by a transaction tax. Although such taxes do reduce noise trader activity, they take a toll on informed trading as well. As a result, while taxes reduce volume, they do not affect spreads and price impact measures, and have at most a weak effect on the informational efficiency of prices.

Before turning to my three questions, it is worth explicating the power of the “accounting as language” metaphor. People communicate through written natural languages by selecting words from a standard vocabulary, combining them in meaningful ways according to relatively rigid rules of grammar, and then organizing those words into sentences according to relatively flexible rules of syntax and style that allow shades of emphasis and color. People communicate through accounting reports by selecting accounts from a standard vocabulary, combining them in meaningful ways according to the relatively rigid rules of double-entry bookkeeping, and then organizing those words into financial reports according to relatively flexible rules of presentation. The metaphor is by no means perfect. Natural languages are general-purpose tools intended to allow communication about any number of topics, while accounting is a special-purpose tool for communicating about financial state and performance. However, even this difference allows accountants some leverage in applying the metaphor to the following questions.

Li [2008. Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, this issue, doi:10.1016/j.jacceco.2008.02.003] finds that firms with losses, or with transient income, write annual reports with long sentences and big words. I begin by discussing some explanations for Li's primary results, using his more detailed results, along with the results of related papers, to assess the plausibility of those explanations. I then briefly discuss the 10-K's of a single company over the course of 3 years, to provide more detailed insight into what might drive the length and readability of annual reports. Finally, I present some possible directions for future research.

Jonathan Haidt's Moral Foundations Theory identifies five moral axes that can influence human motivation to take action on vital problems like climate change. The theory focuses on five moral foundations, including compassion, fairness, purity, authority, and ingroup loyalty; these have been found to differ between liberals and conservatives as well as Democrats and Republicans. Here we show, based on the Cornell National Social Survey (USA), that valuations of compassion and fairness were strong, positive predictors of willingness to act on climate change, whereas purity had a non-significant tendency in the positive direction (p = 0.07). Ingroup loyalty and authority were not supported as important predictor variables using model selection ([Formula: see text]). Compassion and fairness were more highly valued by liberals, whereas purity, authority, and in-group loyalty were more highly valued by conservatives. As in previous studies, participants who were younger, more liberal, and reported greater belief in climate change, also showed increased willingness to act on climate change. Our research supports the potential importance of moral foundations as drivers of intentions with respect to climate change action, and suggests that compassion, fairness, and to a lesser extent, purity, are potential moral pathways for personal action on climate change in the USA.

In the published proceedings of the first Journal of Accounting Research Conference, Vatter [1966] lamented that “Gathering direct and original facts is a tedious and difficult task, and it is not surprising that such work is avoided.” For the fiftieth JAR Conference, we introduce a framework to help researchers understand the complementary value of seven empirical methods that gather data in different ways: prestructured archives, unstructured (“hand-collected”) archives, field studies, field experiments, surveys, laboratory studies, and laboratory experiments. The framework spells out five goals of an empirical literature and defines the seven methods according to researchers’ choices with respect to five data gathering tasks. We use the framework and examples of successful research studies in the financial reporting literature to clarify how data gathering choices affect a study’s ability to achieve its goals, and conclude by showing how the complementary nature of different methods allows researchers to build a literature more effectively than they could with less diverse approaches to gathering data.

In an environment where capital market participants collectively possess superior information about a decision faced by a firm manager, we use an experimental market to analyze the effectiveness with which the market communicates this information to the manager through stock price. We do so in a setting in which an inherent conflict exists between pricing that communicates information to the manager and pricing that accurately values the firm given the manager’s optimal response to the communicated information. Despite this conflict, we find that when the manager initially selects a low-value project, the stock price from the capital market is lower than the price that accurately values the firm given the manager’s optimal response to this price. Because managers often respond to this lower stock price by switching to a higher value project, firms with the lowest initial stock price generate the greatest future returns. Consistent with behavioral theory, we further highlight that imposing a small cost on the manager for switching projects decreases the communicative effectiveness of price leading to lower future returns in response to a low stock price. Collectively, our results potentially contribute to a better understanding of the seemingly anomalous book-to-market effect and results from the executive compensation literature.