Prior studies document that managers consider a variety of costs and benefits when deciding whether to issue earnings forecasts. Using an abstract experiment and a survey of experienced financial managers, we provide evidence that managerial overconfidence may also contribute to this decision. Our experiment shows that participants engage in self‐serving attribution, giving greater weight to internal than external factors as explanations for good performance. This increases confidence in improved future performance, which increases their willingness to issue forecasts. Two facets of the stable individual trait overconfidence, dispositional optimism and miscalibration, also contribute to confidence in improved future performance and willingness to issue forecasts. Consistent with these results, experienced financial manager survey participants believe other managers are likely to overestimate the extent to which they contribute to positive firm performance, and both overoptimism about firm performance and overconfidence in their ability to predict future firm performance contribute to issuance of earnings forecasts.

Examines the effectiveness of two types of decision aids designed to alleviate the effects of one type of task-knowledge mismatch on auditors' judgments. Organization of audit planning tasks; Content and organization of auditors' knowledge; Specific processing problems caused by mismatch between task organization and knowledge organization.

This experiment examines whether there are systematic offsetting differences in the manner in which initial decision makers and reviewers attend to information which ensure that evidence inconsistent with initial judgments is given adequate consideration. Differences in attention are proposed, which result in differential recall of evidence by the initial decision maker and reviewer and thus influence what knowledge initial decision makers and reviewers bring to their discussions and subsequent decisions. The results suggest that the review process can act as an effective control by increasing the chances that the implications of inconsistent evidence are considered.

Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for managements track record of downwardly biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research.

Prior research indicates that analysts do not fully adjust for the general downward bias in earnings guidance issued by management. We report the results of two experiments designed to investigate how guidance track record and analysts’ incentives jointly explain the extent to which analysts adjust for guidance bias. Our results suggest that analysts with accuracy incentives adjust for management’s track record of downwardly biased guidance when the bias is relatively small (one cent), but those with relationship incentives do not. Furthermore, the difference in adjustment is larger when the bias track record is inconsistent than when it is consistent. Also, when guidance bias is larger (two cents) relative to smaller (one cent), analysts with relationship incentives partially adjust, as they appear to strike a balance between accuracy and their desire to please management. These findings hold implications for investors, regulators, and the interpretation of prior research.

We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock-compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability. These results have implications for the interpretation of prior research on the reliability of recognized and disclosed numbers, for financial-accounting standard setters who may want to consider the reliability effects of their recognition versus disclosure decisions, and for auditing standard setters who may wish to clarify auditors' responsibilities for preventing misstatements in disclosed amounts.

Preannouncements of earnings tend to overstate negative or understate positive news, which decreases the chance of a negative surprise when actual earnings is announced. We conduct an experiment to investigate how experienced sell‐side analysts’ earnings forecasts are affected by preannouncements that either understate, accurately state, or overstate the magnitude of positive or negative total earnings news, holding total earnings news constant. We find that firms with negative (positive) total news receive the highest post‐earnings announcement forecasts of future earnings when the earlier preannouncement overstates (understates) the magnitude of the news. These forecasts are consistent with the analysts’ perceptions about the firms’ future prospects, but not their perceptions of management. While analysts expect preannouncements to be lower than actual earnings, they do not adjust their forecasts for these beliefs. These insights into analysts’ responses have implications both for managers and analysts.

In response to recommendations by the AICPA Special Committee on Financial Reporting and the Association for Investment Management and Research, the FASB recently invited comment regarding the question, “Given [efficient] markets, would any disservice be done to the interests of individual investors by allowing professional investors access to more extensive information?” [AICPA (1996) Report of the Special Committee on Financial Reporting and the Association for Investment Management and Research, New York, p. 22]. Research in psychology [e.g. Griffin & Tversky (1992) The weighing of evidence and the determinants of confidence. Cognitive Psychology, 411–435] suggests that less-informed investors may suffer from over-confidence and trade too aggressively given their information. This paper reports on an experiment designed to address these issues. In the experiment, security values are determined by the price/book ratios of actual firms, “more-informed” investors observe three value-relevant financial ratios derived from Value-Line reports, and “less-informed” investors observe only one of those signals. Even after market prices have stabilized after many rounds of trading, less-informed investors systematically transfer wealth to more-informed investors as a result of biased prices and overly aggressive trading. However, alerting less-informed investors to the extent of their informational disadvantage eliminates these welfare losses. The results thus suggest that providing information to only professional investors could harm the welfare of less-informed investors if less-informed investors are not aware of the extent of their informational disadvantage.

We examine whether analysts' incentives to maintain good relationships with management contribute to the optimistic/pessimistic within‐period time trend in analysts' forecasts. In our experiments, 81 experienced sell‐side analysts from two brokerage firms predict earnings based on historical information and management guidance. Analysts' forecasts exhibit an optimistic/pessimistic pattern across the two timing conditions (early and late in the quarter), and the effect is significantly stronger when the analysts have a good relationship with management than when their only incentive is to be accurate. Debriefing results indicate that analysts are aware of this pattern of forecasts, and believe that this benefits their future relationships with management and with brokerage clients. The analysts most frequently cite favored conference call participation and information access when describing benefits from maintaining good relationships with management. Our results suggest the following: The optimistic/pessimistic pattern in forecasts is in part a conscious response to relationship incentives, information access is perceived to be a major benefit of management relationships, and recent regulatory changes may have lessened but have not eliminated this conflict of interest source.