Browsing by Subject "Financial reporting"

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Biased processing of accounting examples and its effect on practitioners' judgments
(2012-08) Capps, Gregory Paul; Koonce, Lisa Lynn, 1959-
Accounting guidance often contains examples which provide practitioners with a description of a hypothetical transaction and its appropriate accounting treatment. Despite this potential to influence accounting judgments, our understanding of how practitioners use such examples when making these judgments is limited. Relying on psychology theory, I propose that practitioners must first assess the level of similarity between the transaction and the example. I predict that when doing this, practitioners unknowingly use a biased cognitive process where they overweight shared aspects between the transactions. Using an experiment, I confirm this prediction and show that this bias causes practitioners to systematically assess similarity between a transaction and example as too high. Results also show that this causes practitioners to consistently overestimate the likelihood that their transaction also qualifies for the same treatment as any example they are given. My study provides insights on how and why examples can systematically affect accounting judgments and has implications for both standard setters and practitioners.
What’s in a name? Investors’ reactions to non-GAAP labels
(2020-04-29) Garavaglia, Shannon M.; White, Brian, 1973-; Harrison, Dave; Jennings, Ross; Kachelmeier, Steve; Koonce, Lisa
Many firms report non-GAAP measures, and there is considerable variation in how firms label these measures. I conduct a survey and two experiments to investigate how non-professional investors perceive non-GAAP labels used in practice, how two commonly-used non-GAAP labels affect non-professional investors’ judgments, and the moderating effects of awareness of managerial discretion in non-GAAP reporting. I find that when awareness of discretion in non-GAAP reporting is low, investors are more willing to invest in a firm that reports higher non-GAAP earnings with a more diagnostic label, specifically a label that implies persistent performance (“core”), compared to when the firm uses a less diagnostic non-GAAP label (“adjusted”), even though the non-GAAP earnings are not more persistent than GAAP earnings. Results further suggest that when awareness of discretion is low, investors rely primarily on the diagnosticity of the non-GAAP label in valuing the firm, causing them to overlook additional non-GAAP information. However, the opposite is true when awareness of discretion in non-GAAP reporting is high: investors are less willing to invest in a firm that reports higher non-GAAP earnings with a label that implies persistent performance because they perceive non-GAAP reporting to be less transparent, and therefore management to be less credible, when using a label that does not match the underlying calculation (i.e., using a label that implies persistence when non-GAAP earnings are not persistent). Additional results suggest non-professional investors value increased transparency in non-GAAP reporting, be it via the non-GAAP label or other features of the non-GAAP disclosure such as the placement of the non-GAAP reconciliation.