Creative Accounting and Investment Analyst Response

This paper investigates the impact of window dressing on stockbroker analyst evaluation of a company's annual accounting numbers. A new methodological approach is used involving a laboratory experiment in which a large sample of experienced investment analysts drawn from five of the top London houses processes real company accounts. The research was conducted in the first half of 1990 at the end of a long bull market. The participating analysts were not overly concerned about the quality of published accounting information and creative accounting was not then viewed as a serious problem. Contrary to our prior expectations we found little evidence of window dressing adjustments being made by the subjects in general. However, those subjects who did correct were significantly more experienced. Possible explanations for our results and potential implications for capital market behaviour and information processing are discussed.