An Experimental Investigation of Explanations for Outcome Effects on Appraisals of Capital-Budgeting Decisions*

Abstract. Studies investigating effects of outcomes on judgments and decisions have been increasing within the business/accounting research literatures. No study, however, has addressed the presence or absence of such effects in terms of potential explanations and the conditions affecting their viability. Three such explanations are the foci of the present study: cognitive reconstruction, self-enhancing motive, and an escalation-of-commitment analogue. The viability of these explanations was investigated experimentally in an accounting context in which subjects evaluated a capital-budgeting committee's funding priority decisions with or without project outcome information (five-year operating results). Experimental results fully support the cognitive reconstruction explanation for outcome effects on decision appraisals but provide only limited support for the self-enhancing motive and escalation-of-commitment explanations. Results of additional experimentation are presented, further supporting logic inherent in the hypothesis derived from the cognitive reconstruction explanation. The relationship of the present study to prior research and implications for future research and practice are discussed. Résumé. Les études portant sur l'analyse de l'incidence de l'issue d'une situation sur les jugements posés et les décisions prises par la suite se sont multipliées dans la recherche en gestion et en comptabilité. Aucun chercheur ne s'est pourtant penché sur la présence ou l'absence d'une telle incidence en s'interrogeant sur son explication potentielle et sur les facteurs qui influent sur sa viabilité. La présente étude s'articule autour de trois de ces explications: la reconstruction cognitive, la promotion personnelle et un équivalent de l'escalade de l'engagement. La viabilité de ces explications a été soumise à une étude expérimentale dans un contexte comptable dans lequel les sujets évaluaient les décisions d'un comité chargé du choix des investissements dans le cadre de l'établissement des priorités en matière d'affectation des fonds, avec ou sans information sur l'issue des projets (résultats d'exploitation de cinq ans). Les résultats de l'expérience confirment sans équivoque l'explication de la reconstruction cognitive relativement à l'incidence de l'issue des projets sur les évaluations décisionnelles, mais ils n'appuient que de façon mitigée les explications de la promotion personnelle et de l'escalade des engagements. Les auteurs exposent les résultats d'autres expériences, qui viennent étayer la logique sous-jacente à l'hypothèse fondée sur l'explication de la reconstruction cognitive. Ils analysent enfin la relation entre la présente étude et les travaux de recherche antérieurs de même que ses conséquences éventuelles sur la recherche et la profession.     

Discussion of “Financial Statement Comparability and the Efficiency of Acquisition Decisions”

Chen, Collins, Kravet, and Mergenthaler (CCKM, 2018 ) is an empirical investigation of whether, after controlling for other known determinants of an acquirer's abnormal stock returns and expected and realized synergies, financial statement comparability impacts the investment decisions surrounding the acquirer's purchase of another company. The primary result is that higher financial statement comparability, as measured by De Franco, Kothari, and Verdi (DKV, 2011 ), yields improvements on outcomes associated with mergers and acquisitions. This discussion presents some criticisms of the DKV measure as applied to this study; the main criticism being whether the DKV measure captures accounting comparability or the risk of the target firm. The empirical results presented in CCKM are consistent with both explanations, thus making it difficult to disentangle CCKM's interpretation from an alternative explanation of their empirical findings.     

“Post‐Truth,” “Alternative Facts” and “Fakenomics”

South African companies are accused of hoarding profits to accumulate large amounts of “idle” cash, as well as of being the perpetrators of massive illegal capital flight. This paper argues that much of the claimed corporate cash is either offshore or belongs to banks. It reminds that bank deposits increase when companies borrow, not when they retain profits. It shows, too, that measures of massive capital flight actually reflect data errors. Exaggerating, through faulty methodology the extent to which companies have cash or may be involved in illegal capital flight is unhelpful. It exacerbates already‐fraught government‐business relations, and complicates the search for solutions to South Africa's economic problems.     

“Regional questions”

Publications Reviewed:

Royal Town Planning Institute, 1986: Strategic Planning for Regional Potential. A discussion document.

Royal Institution of Chartered Surveyors, 1986: Regional Policy-A Fresh Approach.

Armstrong, H. and Taylor, J. 1987: Regional Policy: The Way Forward. The Employment Institute.

Northern Region Councils Association, 1986: The State of the Northern Region.

South East Economic Development Strategy (SEEDS), 1987: South-South Divide. An exposition of the SEEDS project.     

”Uneven development“

John Allen and Doreen Massey (eds), 1988: The Economy in Question. London: Sage Publications, £8.95 paper.

Doreen Massey and John Allen (eds), 1988: Uneven Re-Development: Cities and Regions in Transition. A Reader. London: Hodder and Stoughton, £7.50 paper.

Kevin Morgan and Andrew Sayer, 1988: Microcircuits of Capital: “Sunrise” Industry and Uneven Development Oxford: Polity Press. £35.00 cloth.     

“Creating jobs — meeting needs”

Centre for Local Economic Strategies, 1988: Meeting Real Needs — Creating Real Jobs. Research Study Series No. 1, Alberton House, St. Mary's Parsonage, Manchester M3 2WJ.£10.00.