SFAS 8 and information inductance: An experiment

Awareness of the potential economic consequences of accounting standards has increased in the accounting literature over the last several years. The effects on management behavior of accounting standards has been cited as one of the consequences. This paper reports the results of a controlled behavioral experiment which examined the effects on managerial actions of Statement of Financial Accounting Standards 8.An accounting variable and an organizational climate variable were manipulated as independent variables. The dependent variable involved a measure of tradeoff between cash flow consequences to the firm and bottom line (net income) effects to the firm. Results of the non-parametric tests performed indicate that managers will sacrifice cash flows in making decisions, if the bottom line effects are disadvantageous to their own position.