Accounting for decisions and decisions for accounting

Behavioral decision theory (BDT) is concerned with “accounting for decisions”. The development of this interdisciplinary field is traced from the appearance of several key publications in the 1950s to the present. Whereas the 1960s saw increasing theoretical and empirical work, the field really started to flourish in the 1970s with the appearance of the review by Slovic & Lichtenstein (Organizational Behavior and Human Performance, pp. 549–744, 1971), and key papers on probabilistic judgment (Tversky & Kahneman, Science, pp. 1124–1131, 1974), and choice (Kahneman & Tversky, Econometrica, pp. 263–291, 1979). From the early 1980s to the present, BDT has seen considerable consolidation and expansion and its influence now permeates many fields of enquiry. After this brief history, eight major ideas or findings are discussed. These are: (1) that judgment can be modeled; (2) bounded rationality; (3) to understand decision making, understanding the task is more important than understanding the people; (4) levels of aspiration/reference points; (5) use of heuristic rules; (6) the importance of adding; (7) search for confirmation; and (8) thought as construction. Next, comments are addressed to differences between BDT and problem solving/cognitive science. It is argued that whereas many substantive differences are artificial, two distinct communities of researchers do exist. This is followed by a discussion of some major shortcomings currently facing BDT that include questions about the robustness of findings as well as overconcern with a few specific, “paradoxial” results. On the other hand, there are many interesting issues that BDT could address and several specific suggestions are made. Moreover, these issues represent opportunities for accounting research and several are enumerated. Finally, BDT presents “decisions for accounting” in the sense that scarce resources need to be allocated to different types of research that could illuminate accounting issues. The argument is made that BDT is one research metaphor or paradigm that has proved useful in accounting and that should be supported. Such support, however, may mean that some researchers may work on issues that, at first blush, might seem distant from accounting per se.     

Testing for Income Smoothing Using the Backing Out Method: A Review of Specification Issues

This study investigates potentially spurious correlation in prior studies of income smoothing which use a research method that we call backing out. If E is reported income, Y a discretionary earnings component hypothesized to smooth income, and T the smoothing target, the backing out method consists of regressing Y on E – Y – T. A negative regression coefficient is interpreted as evidence that Y is being managed to smooth earnings. We argue that the negative regression coefficient may simply reflect the positive correlation between E and T, which may or may not be the result of manipulating Y. If E is not manipulated by Y, the negative regression coefficient reflects measurement errors in E – Y as an estimate of unmanaged earnings.We replicate the backing out method of prior studies and use each of the accrual and cash flow components of earnings in the Statement of Cash Flows for Y. We find that the regression coefficient, hypothesized to be negative because of smoothing with Y, is always negative and its magnitude depends on the variances of Y and E – T (smoothing error) independent of the nature of Y (discretionary or nondiscretionary). We conclude that the negative coefficient on E – Y – T is equally consistent with three possibilities: (1) managers smooth earnings with Y, (2) managers smooth earnings with something other than Y, and (3) managers do not smooth earnings at all.     

The interplay between professional groups, the state and supranational agents: Pax Americana in the age of ‘globalisation'

In response to recent calls for systematic and in-depth studies of the impact of international forces on local accounting practices, discourses and institutions, this essay explores the interconnectedness of national politics with global forces and the ramifications of this interaction for the regulation of accounting and the state–profession relationship. The paper employs Held's (1991) framework [Held, D. (1991). Democracy, the nation-state and the global system. Economy and Society, 20(2), 138–172.] on the role of the nation state in the age of globalisation, extended to encompass insights from the realist paradigm on international politics, to examine the international aspects of an attempt by a group of indigenous auditors in Greece to recapture their monopoly status, following the ‘liberalisation' of the Greek auditing profession in 1992. The paper explores changes in the state–profession relationship in the era of ‘globalisation' and documents the catalystic role of major states (the USA), politico-economic blocks (the EU), and other powerful international actors. It is posited that the politics of international accounting professionalism in the ‘globalisation' era are becoming more polycentric with (lesser) nation-states as merely one level (of diminishing importance) in a complex system of superimposed, overlapping and often competing national and international agencies of governance. The lessons to be learned from the Greek experience seem to be relevant to a number of countries — weaker or more important players in the world economy and politics — as they realign the assemblage of government in accounting and in other domains, in response to the progressive internationalisation of the world economy.     

A Note on Gaussian Estimation of the CKLS and CIR Models with Feedback Effects for Japan

In this note we extend the Gaussian estimation of two factor CKLS and CIR models recently considered in Nowman, K. B. (2001, Gaussian estimation and forecasting of multi-factor term structure models with an application to Japan and the United Kingdom, Asia Pacif. Financ. Markets 8, 23–34) to include feedback effects in the conditional mean as was originally formulated in general continuous time models by Bergstrom, A. R. (1966, Non-recursive models as discrete approximations to systems of stochastic differential equations, Econometrica 34, 173–182) with constant volatility. We use the exact discrete model of Bergstrom, A. R. (1966, Non-recursive models as discrete approximations to systems of stochastic differential equations, Econometrica 34, 173–182) to estimate the parameters which was first used by Brennan, M. J. and Schwartz, E. S. (1979, A continuous time approach to the pricing of bonds, J. Bank. Financ. 3, 133–155) to estimate their two factor interest model but incorporating the assumption of Nowman, K. B. (1997, Gaussian estimation of single-factor continuous time models of the term structure of interest rates, J. Financ. 52, 1695–1706; 2001, Gaussian estimation and forecasting of multi-factor term structure models with an application to Japan and the United Kingdom, Asia Pacif. Financ. Markets 8, 23–34). An application to monthly Japanese Euro currency rates indicates some evidence of feedback from the 1-year rate to the 1-month rate in both the CKLS and CIR models. We also find a low level-volatility effect supporting Nowman, K. B. (2001, Gaussian estimation and forecasting of multi-factor term structure models with an application to Japan and the United Kingdom, Asia Pacif. Financ. Markets 8, 23–34).     

tay's as good as cay: Reply

In a recent comment on our published work [Lettau, M., Ludvigson, S., 2001. Consumption, aggregate wealth, and expected stock returns. Journal of Finance 56, 815–850], Michael Brennan and Yihong Xia [2005. tay's as good as cay. Finance Research Letters 2, 1–14] advance the following argument: A “mechanistic” variable tay, where t is a linear time trend, forecasts stock returns. Since “t has no foresight,” the argument goes, the predictive power of this variable must be attributable to what they call “look-ahead bias.” The authors assert that cay is subject to the same look-ahead bias (generated because we use the full sample to estimate the cointegrating parameters in cay), implying that its forecasting power must be spurious. In this response, we explain why this critique is misplaced.     

Global modelling in the 1990s : A critical evaluation of a new wave

It seems that after a ‘golden decade’ in the 1970s and a period of decay in the 1980s, global modelling is making a comeback. In particular, the report Scanning the Future seems to mark the beginning of a new era in this respect. In this article this ‘new wave’ of the 1990s is compared with the ‘old wave’ of the 1970s. Although there is progress in the scientific realm, these new models lack a deep concern for the burning problems of our time like the poverty gap between the North and the South and the ‘ecological problematique’. In many ways these new models reflect the new mood of the times, which lacks any vision of a new paradigm and which is strongly ‘northern-centric’.     

A coevolutionary analysis of organisational systems and processes: Quantitative applications to information system dynamics in small entrepreneurial firms

We present a quantitative, dynamic analysis of coevolution in the new firm. Organisation is treated as a process, rather than a state, involving the simultaneous evolution of interacting systems within, and between, small firms and their environment. Our quantitative analysis uses primary source, time-elapsed data, obtained by face-to-face interviews with entrepreneurs. We found a link between performance and microevolutionary experience. High performers were more innovative, more radical ‘change makers’, more willing to ‘wait and see’, and more willing to use ‘soft’ technologies than low performers.     

A comparative analysis of the construct validity of coefficients in paramorphic models of accounting judgments: A replication and extension

This study adds to research which examines the construct validity of coefficients of cue importance in studies concerned with how decision-makers use accounting information in formulating judgments (see Larcker & Lessig, The Accounting Review, January, 1983, pp. 58–77; Selling & Shank, Accounting, Organizations and Society, 1989, pp. 65–77). Historically, accounting studies have modelled cue importance with almost exclusive reliance upon linear models. But as the Selling & Shank study indicates, inferring the importance of accounting cues through reliance upon only one kind of model can leave “method variance” undetected and raises threats to the construct validity of coefficients (see Cook & Campbell, Quasi-experimentation: Design and Analysis Issues for Field Settings, 1979, pp. 59–70). To the extent that cue importance appears similar across models, then the model coefficients are presumed more valid. While Selling & Shank compare linear models to process tracing models, we compare a linear model to an eigenvector-scaling routine known as the Analytic Hierarchy Process (see Saaty, The Analytic Hierarchy Process, 1980). As with Selling & Shank, we find that the importance of cues is sensitive to model choice, suggesting that more research is needed into method variance before judgments can be made with respect to the construct validity of linear coefficients in accounting studies.     

Life in the tube

Douglas Rushkoff, author of Media Virus, Cyberia, and Playing the Future, explains how sensationalism in the media tends to promote our culture's natural, unexpressed agendas. This is an optimistic appraisal of the seemingly banal and exploitative fora of tabloid television, ‘Court TV’ and ‘Cops’. Such low-brow media, when approached from an evolutionary perspective, reveal themselves as the process by which closeted social issues are brought out into the cultural conversation exactly when they need to be.     

Reconsidering performance evaluative style

Journal of Accounting Research, 10, 156–182, modeled “performance evaluative style” as the predictor of unintended effects from performance measurement control systems, stimulating one of the few areas of cumulative research in behavioral accounting. However, despite twenty-five years of empirical testing, this stream of research has failed to converge. This paper considers the validity issues created by evolution in the conceptualisation and specification of the relevant variables and classifies them by calculation type. Results of an empirical test designed to explore comparability between the variable types are reported. Finally, implications for interpreting prior research and for future research directions are considered. ©     

Professional accounting development in Nigeria: threats from the inside and outside

Over the years several, sometimes conflicting, theories attempting to explain the development of professions have emerged. The “functionalist” and “interactionist” theories have since lost the spotlight to a more critical approach based on the Weberian concept of closure. Limitations in the concept and practice of this neo-Weberain concept have led to suggestions that research into the sociology of professions, should also include historical analyses of professionalism that capture historical specificities with the aim of generating theory that sees beyond “just massive historical variation” [Collins, R. (1990). Changing conceptions in the sociology of the profession. In R. Torstendahl, & M. Burrage, The formation of professions: Knowledge, state and strategy. London: Sage Publications]. Such research should also investigate the structural conditions under which the professionalisation process takes place [Johnson, T. (1977). The profession in the class structure. In R. Scase, Industrial society: Class, cleavage and control. London: George Allen and Unwin.]. In order to achieve this, there is the need to critically study the relationship of the State and the profession [Klegon, D. (1978). The sociology of professions: an emerging perspective. Sociology of Work and Occupations, 5, 3, 259–283.] and to document more extensively, the process, rather than the product, of closure [Chua, W. F., & Paullaos, C. (1993). Rethinking the profession-state dynamic: the case of the Victorian Charter Attempt, 1885–1906, Accounting, Organizations and Society, pp. 128–691; Chua, W. F., & Paullaos, C. (1998). The dynamics of “closure” amidst the construction of market, profession, empire and nationhood: an historical analysis of an Australian Accounting Association. Accounting, Organizations and Society, 23 (2), 155–187; Ramirez, C. (2001). Understanding social closure in its cultural context: accounting practitioners in France (1920–1939), Accounting, Organizations and Society.]. Such is the approach of this article, which focuses on the development of the accounting professions in Nigeria. It critically examines the profession/ State dynamics that have helped shape the outcome of the various episodes in the history of the accounting profession in Nigeria. An important influence in this dynamics is the nature of government in place (i.e. military or civilian).     

The evolution of management accounting routines in small businesses: a social construction perspective

This paper explores the development of management accounting in small firms through a social construction perspective. Taking Dirsmith’s (1998) (Dirsmith, M. W. 1998. Accounting and control as a solution to technical problems, political exchanges and forms of social discourse: the importance of substantive domain, Behavioural Research in Accounting, 10 (Supplement), 65–77) lead we examine the evolution of control and decision-making processes within four growth-orientated service sector businesses. Key to the perspective is the notion of the owner–manager and his/her employees as creators of management accounting routines that form through a cycle of action, externalization and habitualization. These routines still remain in the control of the originator and are flexible in nature. As the business grows these routines may become objectified into localized management accounting ‘facts’ and they may also be challenged by externally imported accounting conventions. This paper explores the creation of idiosyncratic accounting knowledge and the effects of its transmission over the history of the businesses.     

The two faces of organizational information

Organizational information, i.e. “facts” given and taken, and inferences drawn and established by participants within an organizational situation, may be examined in terms of its import to the relationship between an organization and its environment. A “locus” for organizational information is established in which information is classified as: (a) either inner- or other-directed: (b) either internally- or externally-based; and (c) either self- or other-referencing. Examples of organizational information in each of the eight possible categories are readily identified. Much, if not most, organizational information is probably best regarded as “two-faced”, i.e. as the product of inner- and other-directed needs taken together. For this reason, the basis, or justification of any item of organizational information is often obscure. This is seen to have consequences for organizational self-learning and self-delusion, and for the maintenance of organizational credibility and organizational secrets.     

Reducing conflict in balanced scorecard evaluations

Recent studies [Ittner, C., & Larcker, D. (2003). Coming up short on nonfinancial performance measurement. Harvard Business Review(November) 88–95; Ittner, C., Larcker, D., & Randall, T. (2003b). Performance implications of strategic performance measurement in financial services firms. Accounting, Organizations and Society, 28, 715–741] provide evidence of companies’ tendency to overlook the validity of the causal links between driver and outcome measures of the balanced scorecard (BSC), and to ignore the underlying strategically-linked causal business models. It is posited that this propensity leads to conflict between top management and divisional managers because of the failure of the former to evaluate and consider strategy effectiveness in performance evaluation. The present study hypothesizes that individuals in the top-manager role do not take into account strategy effectiveness unless they are explicitly required to do so. In contrast, individuals in the store-manager role automatically consider the quality of strategy without being prompted to do so. A study using 63 evening MBA students provides support for the hypotheses. The results have implications for the study of evaluation biases in BSC as well as in other performance measurement systems, and for devising means to mitigate them.     

The most influential journals in academic accounting

In this article we summarize the findings of articles that have ranked academic accounting journals, as well as articles that provide other bases for considering journal quality. Results indicate that five journals—Accounting, Organizations and Society, Contemporary Accounting Research, Journal of Accounting and Economics, Journal of Accounting Research, and The Accounting Review—rank consistently as the top journals in the field. However, these five journals differ substantially as to the numbers of articles they publish overall as well as the proportions of articles that are related to the various specialty areas of accounting. Further, the relative proportions of articles by area do not correspond to the numbers of individuals working in the specialty areas. Financial accounting articles appear in disproportionately high numbers for all journals except Accounting, Organizations and Society, whereas management accounting articles appear in disproportionately low numbers for all journals except Accounting, Organizations and Society. In all journals, systems and tax articles also appear to be disproportionately low vis-à-vis the numbers of individuals working in these areas. Auditing receives fairly even exposure across journals and vis-à-vis individuals in the area, except in the Journal of Accounting and Economics.     

Valuing customers and loyalty: The rhetoric of customer focus versus the reality of alienation and exclusion of (de valued) customers

The accounting practice of customer valuation ostensibly emerged from the so-called “customer revolution" of the 1980s. Early conceptions centred around notions such as customer focus and providing value to customers, but these ideas have latterly given way to calculation of the financial value of customers to an organisation. Integral to customer valuation are the reconstruction of the customer as an asset (or liability) of the organisation, the segmentation of customers into identifiable groups, and the treatment of customers as dollars rather than people. Whilst rhetoric of “the customer is king" persists, accounting for customer valuation brings its own transformative terminology and has become a means for organisations to selectively focus on particular customers, rather than the customer in general. The paper examines the health insurance and banking industries as exemplars of the affects of customer valuation, and discusses pivotal issues of access, equity, alienation, and social exclusion. Customer valuation is shown to have become a means to increase shareholder income and wealth, almost inevitably at the cost of (further) marginalising the poor and disadvantaged.     

Information and the transnational SME controller

One of the issues that face the small- and medium-sized enterprise (SME) when expanding is the ‘control’ issue and this paper investigates and presents preliminary evidence of ‘controlling’ or ‘management accounting’ practice in a transnational SME. Wibsey, the site of the case, is now a small group of companies that have expanded from a U.K. base into 10 European countries. This expansion has posed complex problems, which have increased the information requirements of the SME. The contextual issues of complexity and resulting challenges for the transnational organization in its management accounting, information and control systems are considered. Wibsey uses traditional management accounting as the basis of supporting decision-making in the group and a lower level of information need is reported, in contrast to Dent (1996) (Dent, J. F., 1996. Global competition: challenges for management accounting and control,Management Accounting Research , 7(2), 247–269), because the group chooses to maintain a traditional ‘accounting-led’ evaluation system in controlling and evaluating its transnational operations.     

The Halloween Effect and Japanese Equity Prices: Myth or Exploitable Anomaly

Bouman and Jacobsen (American Economic Review 92(5), 1618–1635, 2002) examine monthly stock returns for major world stock markets and conclude that returns are significantly lower during the May–October periods versus the November–April periods in 36 of 37 markets examined. They argue that, in general, the Halloween strategy outperforms the buy and hold strategy thereby casting doubt on the validity of the efficient market paradigm. More recently, Maberly and Pierce (Econ Journal Watch 1(1), 29–46, 2004) re-examine the evidence for U.S. equity prices and conclude that Bouman and Jacobsen’s results are not robust to alternative model specifications. Extending prior research, this paper examines the robustness of the Halloween strategy to alternative model specifications for Japanese equity prices. The Halloween effect is concentrated in the period prior to the introduction of Nikkei 225 index futures in September 1986. After the internationalization of Japanese financial markets in the mid-1980s, the Halloween effect disappears.JEL classification: G14, G15     

Knowing efficiency: the enactment of efficiency in efficiency auditing

This paper reports an ethnographic study of the activities of auditors in the field as they work to fulfil an efficiency auditing mandate; it analyses how auditors report on efficiency in practice. Miller and Rose's work on governmentality (Miller & Rose (1990). Governing economic Life. Economy and Society, 1–31; Rose & Miller (1992). Political power beyond the state: problematics of government. British Journal of Sociology, 173–205) is developed as it applies to the technologies that Miller and Rose identify as providing the means to realise programmes such as efficiency auditing. The study explores the operationalisation of efficiency auditing through analysis of three audits as they were conducted in the field. It is argued that in the absence of detailed rules or standards practitioners themselves developed an agreed upon knowledge and sensibility that allowed them to make efficiency auditing tractable. The paper explicates these normative guides and discusses the consequences of an apparently socially constructed form of efficiency in guiding auditing practice.     

Syndicated Loans

This paper analyzes the market for syndicated loans, a hybrid of private and public debt, which has grown at well over a 20% rate annually over the past decade and which totaled over $1 trillion in 1997. We identify empirically the factors that influence a bank or nonbank's decision to syndicate a loan and the determinants of the proportion of the loan sold in the event of syndication. The evidence reveals a loan is more likely to be syndicated as information about the borrower becomes more transparent, as the syndicate's managing agent becomes more “reputable”, and as the loan's maturity increases. The lead manager holds larger proportions of information-problematic loans in its own portfolio. Loan syndications, like loan sales, appear to be motivated, in part, by capital regulations, and the liquidity position of the agent bank influences the likelihood of syndication, but not the extent. Our results confirm that information and agency problems affect the salability of debt claims and the extent to which a loan is “transaction oriented” rather than “relationship oriented” in the sense of A. Boot and A. Thakor (2000, J. Finance54, 679–713). Journal of Economic Literature Classification Numbers: D82, G20, G21, G24.