Can investors fully adjust for known biases in manager communications?

Managerial communications often contain biased information because of managerial incentives and other influences. A common assumption in the accounting literature is that if investors are aware of managerial biases, they will be able to fully adjust for those known biases when reacting to managerial communications. Drawing on insights from psychology, I experimentally document that investors are not able to fully adjust for known biases in managerial communications--even when investors know the quantitative amount of the manager's bias. Indeed, investors behave contrary to economic theory as they are unable to fully unravel the effects of known biases when rendering judgments about the firm. My study has implications for researchers, regulators, and investors.