MAKING ACCOUNTING KNOWLEDGE: PEERING AT POWER

Academic accounting's gravitation toward the norms of the academy has included the incorporation of peer review practices as the primary means by which scholarship is accepted for publication, and thereby elevated to the official knowledge of the discipline. Surprisingly, the acceptance of peer review has lapsed into a taken-for-granted safeharbor. This paper uses the theoretical template of modern social theory to challenge the making and sanctioning of accounting research. Ideas from Kuhn are rejected in favor of those grounded in Giddens and Foucault in order to focus more clearly upon the consequences of peer review rather than its process characteristics.     

How (un) ethical are you?

Answer true or false: "I am an ethical manager." If you answered "true," here's an Uncomfortable fact: You're probably wrong. Most of us believe we can objectively size up a job candidate or a venture deal and reach a fair and rational conclusion that's in our, and our organization's, best interests. But more than two decades of psychological research indicates that most of us harbor unconscious biases that are often at odds with our consciously held beliefs. The flawed judgments arising from these biases are ethically problematic and undermine managers' fundamental work--to recruit and retain superior talent, boost individual and team performance, and collaborate effectively with partners. This article explores four related sources of unintentional unethical decision making. If you're surprised that a female colleague has poor people skills, you are displaying implicit bias--judging according to unconscious stereotypes rather than merit. Companies that give bonuses to employees who recommend their friends for open positions are encouraging ingroup bias--favoring people in their own circles. If you think you're better than the average worker in your company (and who doesn't?), you may be displaying the common tendency to overclaim credit. And although many conflicts of interest are overt, many more are subtle. Who knows, for instance, whether the promise of quick and certain payment figures into an attorney's recommendation to settle a winnable case rather than go to trial? How can you counter these biases if they're unconscious? Traditional ethics training is not enough. But by gathering better data, ridding the work environment of stereotypical cues, and broadening your mind-set when you make decisions, you can go a long way toward bringing your unconscious biases to light and submitting them to your conscious will.     

Connecting earnings management to the real World:What happens in the black box of the boardroom?

This British Accounting & Finance Association (BAFA) distinguished academic 2020 plenary address marries the researcher's two main research areas – financial reporting and corporate governance. Like Vivien Beattie (BAFA 2011 distinguished academic), the researcher commenced in the positivist tradition but was increasingly drawn to more qualitative, interdisciplinary perspectives, influencing the paper's positioning.“Accounting choice”, “income smoothing”, “earnings management”, and “earnings manipulation” are terms frequently used in the academic literature. This paper reviews these terms, highlighting the resonances and dissonances between them, and attempts to reconcile varied perspectives in the prior literature. The paper critiques taken-for-granted assumptions underlying this stream of research. The paper then examines prior earnings management research using alternative methodologies to deepen understanding of the four terms in praxis (best practice in practice). The paper reviews prior research on boards of directors using alternative methodologies to those adopted in mainstream corporate governance research, to provide a menu of opportunities to research earnings management inside the “black box” of the boardroom, including proposed research questions for future research. The paper concludes by considering the implications for policymakers and standard setters.     

Deals without delusions

Pursuing a merger or acquisition is inherently difficult. Things get even harder when executives are blind to their own faulty assumptions, say Lovallo--a professor at the University of Western Australia Business School and a senior adviser to McKinsey--and three of his McKinsey colleagues. The authors identify biases that can surface at each step of the M&A process and provide practical tips for rising above them--an approach they call targeted debiasing. During the preliminary due-diligence stage, biases abound. To overcome the confirmation bias, aggressively seek evidence that challenges your initial hypothesis about a deal. The best medicine for overconfidence in identifying revenue and cost synergies is to learn from precedents at your firm and others. Avoiding underestimation of cultural differences between your company and the target requires understanding the differences in the ways people interact at each organization. Misjudging the time and resources you need is at the core of the planning fallacy, which you can elude by formally identifying best practices and continually revisiting them. Finally, dilute conflict of interest by soliciting dispassionate external expertise. The bidding phase is vulnerable to the winner's curse, a phenomenon common in auctions. To avoid paying too much for a target, actively generate alternatives to the deal under consideration and develop a set of bidding cutoff rules. After offering an initial bid, deal makers are susceptible to anchoring, whereby they remain attached to their original price estimate, and to the sunk cost fallacy that they've invested too much to stop now. The secret to overcoming both: Use your newly available access to the target's books to better assess the investment case--and change your tune accordingly.     

A conceptual framework of impression management: new insights from psychology,sociology and critical perspectives

In this paper we develop a conceptual framework, based on the concepts of rationality and motivation, which uses theories and empirical research from psychology/behavioural finance, sociology and critical accounting to systematise, advance and challenge research on impression management. The paper focuses on research that departs from economic concepts of impression management as opportunistic managerial discretionary disclosure behaviour resulting in reporting bias or ‘cheap talk’. Using alternative rationality assumptions, such as bounded rationality, irrationality, substantive rationality and the notion of rationality as a social construct, we conceptualise impression management in alternative ways as (1) self-serving bias, (2) symbolic management and (3) accounting rhetoric. This contributes to an enhanced understanding of impression management in a corporate reporting context.     

Large blocks of stock: Prevalence,size, and measurement

Large blocks of stock play an important role in many studies of corporate governance and finance. Despite this important role, there is no standardized data set for these blocks, and the best available data source, Compact Disclosure, has many mistakes and biases. In this paper, we document these mistakes and show how to fix them. The mistakes and biases tend to increase with the level of reported blockholdings: in firms where Compact Disclosure reports that aggregate blockholdings are greater than 50%, these aggregate holdings are incorrect more than half the time and average holdings for these incorrect firms are overstated by almost 30 percentage points. For researchers using uncorrected blockholder data as a dependent variable, these errors will increase the standard error of coefficient estimates but do not appear to cause bias. However, we find that if blockholders are used as an independent variable, economically significant errors-in-variables biases can occur. We demonstrate these biases using a representative analysis of the relationship between firm value and outside blockholders. An online appendix to our paper provides a “clean” data set for our sample firms and time period. For researchers who need to work outside of this sample, we also test the efficacy of alternative (cheaper) fixes to this data problem, and find that truncating or winsorizing the sample can reduce about half of the bias in our representative application.     

追寻会计学术灵魂 召唤会计理论良知——为《会计研究》创刊30周年而作

会计研究应具有思想性。目前中国会计研究思想性不够,具体表现为文献回顾工作薄弱、片面追求研究方法和单一风格的研究方式。《会计研究》应尽可能为发表具有思想性的会计研究论文提供方便。当前,会计研究正面临"范式革命"的挑战,信息化对传统会计理论已产生了致命冲击,会计理论界必须正视现实,认真负起责任,充分吸取信息化理论研究的有益成果,更新会计理论范式。     

CEO compensation, option incentives, and information disclosure

This paper examines the impact of information disclosure on the valuation of CEO options and the incentives created by those options. Prior executive compensation research in the US has made assumptions about key input variables that can affect the calculation of option values and financial incentives. Accordingly, biases may have ensued due to incomplete information disclosure about noncurrent option grants. Using new data on a sample of UK CEOs, we value executive option holdings and incentives for the first time and estimate the levels of distortion created by the less than complete US-style disclosure requirements. We also investigate the levels of distortion in the UK for the minority of companies that choose to reveal only partial information. Our results suggest that there have to date been few economic biases arising from less than complete information disclosure. Furthermore, we demonstrate that researchers using US data, who made reasonable assumptions about the inputs of noncurrent option grants, are unlikely to have made significant errors when calculating CEO financial incentives or option wealth. However, the recent downturn in the US stock market could result in the same assumptions, producing exaggerated incentive estimates in the future.     

Reflections and projections: A decade of Intellectual Capital Accounting Research

The purpose of this paper is to review and critique the field of Intellectual Capital Accounting Research (ICAR). The literature indicates that an organisational and business revolution is in progress concerning the need to understand the value of knowledge resources and how to manage them. The paper explores the field of ICAR by examining a decade of published research since Petty and Guthrie's (2000) seminal paper on ICA, “Intellectual capital literature review: Measurement, reporting and management” as published in the Journal of Intellectual Capital.The paper has four specific contributions. The first contribution is to identify the field of scholarship associated with ICAR. The second is to provide a comprehensive picture of what has happened in the field of ICAR over the past decade. Third, it provides evidence as to how and why the field of ICAR is changing. Fourth, it highlights areas for future research and policy developments.From these four contributions our definition of Intellectual Capital Accounting (ICA) emerges. That is, ICA is an accounting, reporting and management technology of relevance to organisations to understand and manage knowledge resources. It can account and report on the size and development of knowledge resources such as employee competencies, customer relations, financial relationships and communication and information technologies. Additionally, the analysis highlights several interesting patterns and worrying trends in the field of ICAR.     

A Survey of Managerial Incentives and Investment Bias — Common Structure but Differing Assumptions

Recent models within the agency framework concerning investment bias are reviewed, based upon a simplified structure of the pertinent information asymmetry. Tabulated overviews of contractual structures, critical assumptions, main and ancillary results, implications for future research and management are provided. As a general conclusion, the theoretical case of investment bias is rich and wide-ranging. It is now of interest to develop models and perspectives that focus more on economic fundamentals rather than pursuing additional variations of particular assumptions. Moreover, further research is needed in empirical testing and case studies. In particular, the framework promises to bring new perspectives and managerial implications on the administrative use of capital budgeting methods.     

Accounting for Executive Stock Options: A Case Study in Avoiding Tough Decisions

We review the development of accounting requirements for executive stock options (ESOs) and find that the standard-setting process has been susceptible to pressure groups including the corporate sector, politicians and even the accounting profession itself. The failure of Australian and overseas accounting regulators to take tough decisions may have created a systematic bias towards the use of ESOs which can result in grossly inefficient compensation structures motivated by a desire to maximise reported profits rather than to create optimal managerial incentives. We conclude that most of the arguments against recognition of stock option expense can be dismissed as blatant self-interest at worst, or remarkably muddled thinking at best.     

Peer effects in financial economics: A literature survey

The paper reviews the growing literature on peer effects in finance from theoretical and empirical viewpoints. In particular, we assess the importance of peer behavior on firms’ financial policies, analyze the channels through which they operate, and gauge their magnitude. We particularly review empirical works on herding and peer effects in two subfields of finance: corporate finance and the financial markets. We also discuss the results of many relevant peer-reviewed academic studies and provide research and policy implications. The main conclusion is that peer effects are important in shaping investor and firm decisions. The most critical problem in the peer effect literature is employing an identification strategy to ensure that results are not driven by endogeneity. The paper also discusses ways to address this identification issue and provides a future research agenda.     

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.     

Chief Executive Officer Equity Incentives and Accounting Irregularities

This study examines whether Chief Executive Officer (CEO) equity‐based holdings and compensation provide incentives to manipulate accounting reports. While several prior studies have examined this important question, the empirical evidence is mixed and the existence of a link between CEO equity incentives and accounting irregularities remains an open question. Because inferences from prior studies may be confounded by assumptions inherent in research design choices, we use propensity‐score matching and assess hidden (omitted variable) bias within a broader sample. In contrast to most prior research, we do not find evidence of a positive association between CEO equity incentives and accounting irregularities after matching CEOs on the observable characteristics of their contracting environments. Instead, we find some evidence that accounting irregularities occur less frequently at firms where CEOs have relatively higher levels of equity incentives.     

Desperately seeking synergy

Corporate executives have strong biases in favor of synergy, and those biases can lead them into ill-advised attempts to force business units to cooperate--even when the ultimate benefits are unclear. But executives can separate the real opportunities from the mirages, say Michael Goold and Andrew Campbell. They simply need to take a more disciplined approach to synergy. These biases take four forms. First comes the synergy bias, which leads executives to overestimate the benefits and underestimate the costs of synergy. Then comes the parenting bias, a belief that synergy will be captured only by cajoling or compelling business units to cooperate. The parenting bias is usually accompanied by the skills bias--the assumption that whatever know-how is required to achieve synergy will be available within the organization. Finally, executives fall victim to the upside bias, which causes them to concentrate so hard on the potential benefits of synergy that they overlook the possible downside risks. In combination, these four biases make synergy seem more attractive and more easily achievable than it truly is. As a result, corporate executives often launch initiatives that ultimately waste time and money and sometimes even severely damage their businesses. To avoid such failures, executives need to subject all synergy opportunities to a clear-eyed analysis that clarifies the benefits to be gained, examines the potential for corporate involvement, and takes into account the possible downsides. Such a disciplined approach will inevitably mean that fewer initiatives will be launched. But those that are pursued will be far more likely to deliver substantial gains.     

Are all CEOs above average? An empirical analysis of compensation peer groups and pay design

Companies can potentially use compensation peer groups to inflate pay by choosing peers that are larger, choosing a high target pay percentile, or choosing peer firms with high pay. Although peers are largely selected based on characteristics that reflect the labor market for managerial talent, we find that peer groups are constructed in a manner that biases compensation upward, particularly in firms outside the Standard & Poor's (S&P) 500. Pay increases close only about one-third of the gap between the pay of the Chief Executive Officer (CEO) and the peer group, however, suggesting that boards exercise discretion in adjusting compensation. Preliminary evidence suggests that increased disclosure has reduced the biases in peer group choice.     

The Determinants of Systematic Risk: A Synthesis

This paper contains a review and synthesis of the theoretical research that has examined the corporate determinats of systematic risk (beta). By delineating the underlying assumptions and by using a consistent notation to summarize the research results, this review is designed to facilitate the beta assessment efforts of financial managers, investment analysts, and academic researchers.     

Biased Beliefs,Asset Prices,and Investment: A Structural Approach

We structurally estimate a model in which agents’ information processing biases can cause predictability in firms’ asset returns and investment inefficiencies. We generalize the neoclassical investment model by allowing for two biases—overconfidence and overextrapolation of trends—that distort agents’ expectations of firm productivity. Our model's predictions closely match empirical data on asset pricing and firm behavior. The estimated bias parameters are well identified and exhibit plausible magnitudes. Alternative models without either bias or with efficient investment fail to match observed return predictability and firm behavior. These results suggest that biases affect firm behavior, which in turn affects return anomalies.     

An Examination of the Biases in Estimating the Benefit of Debt Insurance

This paper examines the biases in previous studies of estimating the benefit of debt insurance. We identify three possible sources of estimation biases: selection bias, marketability bias, and premium bias. Our findings indicate that both the selection bias and the marketability bias cause an underestimation of the actual benefit of bond insurance, while the premium bias results in an overestimation. Future research could benefit from this study by explicitly accounting for these estimating biases in obtaining a more accurate evaluation of the role of debt insurance in the market.