03 Behavioral and Experimental Research

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    The Joint Effect of Disaggregated Segment Disclosures and Reporting of Segment Profitability Information on Managers’ Operational Decisions
    ( 2019-08-31) Sealy, Chezham ; Wang, Elaine ; Yu, Yao
    Recently, the Financial Accounting Standards Board (FASB) initiated a project that would require companies to disaggregate all reportable operating segments and expand the list of required items to be reported for each segment (FASB 2019b). In this study, we examine how disaggregated segment disclosures and the reporting of segment profitability information jointly affect managers’ operational decisions. We predict and find that more disaggregated (versus aggregated) segment disclosures can increase managers’ concern about segment-level performance, particularly primary segment performance, and cause them to engage in operational distortion that sacrifices overall firm value. Moreover, this negative effect of segment disclosure disaggregation is exacerbated when segment profitability information is reported, because the within-firm segment profitability comparison increases managers’ pressure to report favorable primary segment performance. Our study informs regulators about potential unintended consequences of the proposed standard and provides new insights into managers’ operational decisions that can be influenced by segment reporting.
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    Lost in Translation? An Exploratory Analysis of Auditors’ Perceptions of the Firms’ Tone at the Top
    ( 2019-08-31) Earley, Christine ; Brown, Veena ; Sanderson, Kerri-Ann
    This study examines public accounting firms’ “tone at the top” with respect to audit quality initiatives from the perspectives of both firm leaders (those who set the tone) and engagement level auditors. Our primary objective is to investigate whether, and to what extent, the tone at the top from leadership regarding audit quality is internalized by engagement auditors as it filters through the firm and the effectiveness of tone at the top communication in conveying the tone throughout the organization. Specifically, we (1) solicit the perceptions of audit firm culture and leadership from the perspectives of audit personnel at the partner and non-partner levels, (2) assess how firm leaders communicate tone at the top through formal and informal communications, and (3) examine the firm work environment and its relation to perceived tone at the top. We employ semi-structured interviews to address our research questions. Participants are from 12 regional and local public accounting firms that audit primarily non-public entities (although some of the firms are also registered with the PCAOB). Each firm provided one audit partner who is considered a firm leader, plus one auditor at rank below partner, for a total of 24 participants. Results indicate that although most firms characterize their tone as being strongly employee- or team-focused (9 of 12 firms in our sample), firm leaders’ communication with and support of employees varies across firms. In addition, firms focus on innovation or other values, such as superior client service. Our results have implications for firms, regulators and academics who are interested in examining the link between tone at the top and audit quality.
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    The Effects of the Internal Control Opinion and Use of Audit Data Analytics on Perceptions of Audit Quality, Assurance, and Auditor Negligence
    ( 2019-08-30) Barr-Pulliam, Dereck ; Brown-Liburd, Helen ; Sanderson, Kerri-Ann
    Advanced audit data analytics tools allow auditors to analyze the entire population of accessible client transactions. Though this approach has measurable benefits for audit efficiency and effectiveness, auditors caution that it does not incrementally increase the level of assurance they can provide relative to the fair presentation of the financial statements. We experimentally examine whether the audit testing methodology (audit data analytics versus traditional sampling) and the type of internal control (ICFR) opinion auditors issue (unqualified versus adverse) are signals of audit quality that affect jurors’ perceptions of auditor negligence after an audit failure. We predict and find that jurors’ perceptions of auditors’ personal control over the audit failure influence their assessment of negligence. We also find that when auditors issue an unqualified ICFR opinion, jurors make higher negligence assessments when auditors employ traditional statistical sampling techniques than when they employ audit data analytics. Lastly, we find that when auditors issue an adverse ICFR opinion, jurors attribute less blame to auditors and correspondingly more blame to management and the investor for an audit failure. Our study informs regulators, practitioners, and academics about the contextual effects of the ICFR opinion as well as the perceived assurance and potential litigation effects of using advanced technological tools in the audit.
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    The Influence of Communication Channel Interactivity on Investors’ Response to Managements’ Linguistic Choices
    ( 2019-08-29) MacKenzie, Nikki ; Bennett, Bradley ; Wang, Elaine
    More firms are now disseminating financial information via the internet, and digital technology allows firms to communicate in a more interactive manner compared to traditional paper-based communication channels. Further, various levels of interactivity exist even within online communication channels. We conduct an experiment to examine how online communication channel interactivity affects investor information processing, as evidenced by investors’ reactions to managers’ linguistic choices within financial disclosures, i.e., term specificity (firm-specific versus general terms) and language extremity (moderately versus extremely positive language). We find that a more interactive channel causes investors to be more sensitive to managers’ linguistic choices, and there is an interactive effect of term specificity and language extremity on investment willingness. Specifically, when managers use moderately (extremely) positive language, investors are more (less) willing to invest in a company with its financial disclosures containing firm-specific (versus general) terms. However, such an interactive effect is much weaker when the communication channel is less interactive. Our findings are important for investors, managers, and regulators to understand how investors’ perceptions and investment decisions could be changed when information is communicated via a more interactive channel.
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    Shielding the Workforce: Does Subordinate Contract Frame Induce Leniency in Superiors’ Decisions?
    ( 2019-08-28) Martin, Rachel ; Thomas, Tyler ; Yatsenko, Dimitri
    Organizations use penalty contracts to deter negative behavior, but these contracts are rarely used for subordinate performance, even though they can provide a positive motivating effect. Prior studies focus on subordinates’ reactions to contract frame to address this paucity of penalty contracts. We examine how subordinates’ contract frame affects superiors’ behavior, specifically their target-setting decisions, and whether a penalty contract increases superiors’ leniency, which could provide a potential explanation for the lack of performance penalty contracts in practice. Using an experiment, we predict and find that superiors’ set more lenient targets for subordinates under a penalty contract compared to a bonus contract, as superiors can project their negative perceptions of penalties onto subordinates and seek to mitigate these perceptions. This finding provides insight into the limited use of penalty contracts in practice, despite the positive effect that penalty contracts have on effort. Further, we find that increasing the salience of subordinates’ contract choice to the superior mitigates leniency under a penalty contract, which could increase the appeal of penalty contracts in practice. We also find that these effects are present only in low Dark Triad superiors, as high Dark Triad superiors set similar targets regardless of subordinates’ contract frame and choice.