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.
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    A Profession at an Inflection Point: Implications of Organizational-Professional Conflict among Valuation Service Providers
    ( 2019-08-28) Mason, Stephani ; Barr-Pulliam, Dereck ; Sanderson, Kerri-Ann
    In this study, whether a valuation-specific professional ideology exists and, if so, the consequences of valuation service providers’ (specialists, hereafter) association with that ideology. We specifically explore whether the alignment of specialists’ professional and organizational identities result in an identity conflict that we specify as organizational-professional conflict (OPC). Using a survey of 222 specialists with extensive valuation experience and who represent a cross-section of sub-specialties, organizational structures, and career paths to valuation, we identified four primary findings. First, consistent with our expectations, we find that OPC is highest (lowest) when specialists’ professional and organizational identities are both low (high) due to an identity conflict. Second, we find that specialists employed by private and public companies reported significantly higher OPC relative to specialists employed by either accounting or independent valuation firms. Third, we find that specialists who report lower versus higher professional identities and who primarily value financial instruments also reported significantly higher perceptions of OPC. We find no difference in professional attitudes among specialists who primarily value non-financial instruments. Lastly, supplemental analyses show that our professional ideology measure is robust to alternative specifications; that specialists who experience higher OPC were associated with more negative job outcomes such as higher turnover intentions; and that specialists at higher ranks reported lower OPC. Our study includes a discussion on implications of these findings for audit and financial reporting quality and should be of broad interest to specialists, auditors, financial statement preparers, regulators, and standards setters.
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    Do males differ from females in the way they set and meet goals? An analysis of marathon runners
    ( 2019-08-22) Allen, Eric ; Dechow, Patricia
    We examine strategies adopted by people completing a well-defined but difficult task: running a marathon. We find strong evidence that males relative to females focus on, and care more about, beating a round number time (e.g., 4:00 hours). Our evidence suggests that setting a round number goal helps males perform better in the race. We find that these males are more likely to run at constant pace (the optimal way to run a marathon) and have more energy to speed up (“kick”) towards the end of the race. In contrast, females are less likely to set round number times as goals, and run more conservatively at the start, pace themselves better throughout the race, and finish with a stronger kick, irrespective of whether their finish time is close to a round number. Our results also suggest that males benefit more from planning than do females, since we find that less experienced males are more likely to start the race too aggressively and slow down considerably (“bonk”) towards the end of the race. Our results have implications for organizations because they suggest that the sexes can subconsciously differ in the strategies they adopt to complete a task and the goals they use to evaluate their performance.
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    Great Effort, Some Concern. How Making Effort to Acquire Information Influences Managerial Reporting
    ( 2019-08-22) Haesebrouck, Katlijn
    I investigate if managers’ tendency to report opportunistically depends on the effort they expend in acquiring the information they need to report. I develop and test theory positing that expending effort to acquire information can justify opportunistic behavior but also enhances a sense of responsibility discouraging unethical actions. I predict that the dominant effect depends on whether the reporting environment induces sufficient concerns for honesty. In my 2 × 2 experiment, managers are either endowed with information to report or required to expend intellectual effort to earn it. I also manipulate whether concerns about honesty are triggered by framing reporting in terms of profit allocation or an ethical dilemma. I find that when honesty is not triggered, managers report earned information more opportunistically than endowed information. However, when the reporting context triggers honesty concerns, the negative effect of earned information on opportunistic reporting is alleviated. These results have strong implications for theory and practice by showing the conditions under which acquiring information detrimentally affects reporting behavior.
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    ( 2019-08-07) Joe, Jennifer ; Commerford, Benjamin ; Dennis, Sean ; Wang, Jenny
    Audit firms are investing millions of dollars to develop artificial intelligence (AI) systems that will help auditors execute challenging tasks (e.g., evaluating complex estimates). Audit firms assume AI will enhance audit quality. However, a growing body of research documents “algorithm aversion” – the tendency for individuals to discount computer-based advice more heavily than human advice, although the advice is identical otherwise. Auditor susceptibility to algorithm aversion could prove costly for the profession and financial statements users. Accordingly, we examine how algorithm aversion manifests in auditor decisions using an experiment that manipulates the source of contradictory audit evidence (human specialist versus AI specialist system) and the degree of structure within the client’s estimation process (higher versus lower) for a complex estimate. Consistent with theory, we find evidence that algorithm aversion amplifies the persuasive effect of greater estimation structure, making auditors more likely to discount contradictory audit evidence and accept management’s preferred estimates.
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    Client data files and auditor skepticism: How do “dirty” files influence auditors’ skeptical judgments and actions?
    ( 2019-07-16) Andiola, Lindsay M. ; Brink, Alisa G. ; Lynch, Edward J. ; Ferguson, Jodie L.
    Auditors receive an abundance of client-prepared data files when performing audit work. With today’s increasingly data-rich environment, these files are likely becoming even more challenging for auditors to cognitively process. Specifically, these data files may have characteristics (e.g., contain errors or irrelevant information; aka “dirty” files) that could challenge their ease of use and interpretation (i.e., processing fluency). Depending on this ease, auditors may view these files as relatively less reliable and trustworthy, resulting in skeptical judgments and actions that are sometimes excessive. This paper reports two experiments examining whether two features of the data files, the presence of minor errors (absent or present) and information load (low or high), influence auditors’ processing fluency, skeptical judgments, and actions. While minor errors should raise auditors’ concerns, greater information load should not. However, we find the lowest processing fluency and highest skeptical judgments and actions when minor errors are present and information load is higher. Our study contributes to the literature by presenting an alternative issue to those raised by regulators (i.e., too much skepticism rather than too little) that can occur when auditors struggle to interpret large amounts of data. From a practical perspective, while access to increased amounts of client data may have benefits, audit firms and clients need to be wary of the potential for wasted time that could create inefficiencies that may affect audit quality.