This study examines whether straight-line depreciation, relative to accelerated depreciation, causes non-executive managers to make non-value-maximizing capital investment decisions. To do this, I conduct experiments in which managers must decide whether to continue using an existing asset or invest in a replacement asset. By design, replacing the existing asset yields higher cash flows and managers are aware of this fact. However, if the asset is replaced, then the greater remaining book value under straight-line depreciation relative to accelerated depreciation causes earnings to be lower. Lower earnings and psychological forces may push managers of firms that use straight-line depreciation away from making the economically efficient capital investment decision. The results suggest that managers of firms that use straight-line depreciation are less likely to invest in a replacement asset than are managers of firms that use accelerated depreciation. Further, the results suggest that managers perceive that an asset depreciated using straight-line depreciation has provided less retrospective utility than an asset depreciated using accelerated depreciation. In turn, I find that depreciation method-induced differences in managers' retrospective utility perceptions influence their prospective utility perceptions, which, in turn, influence managers' asset replacement decisions. By theoretically and empirically linking firms' depreciation method choice to managers' capital investment decisions, I provide evidence that a seemingly innocuous choice made for external financial reporting purposes can cause managers to make non-value-maximizing capital investment decisions.

This study identifies several interrelated reasons why firms’ depreciation method choice is likely to influence managers’ capital investment decisions. We find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight-line depreciation. Further, we find that there has been a migration away from accelerated depreciation to straight-line depreciation over the past two decades. Firms that make such accounting changes make smaller capital investments in the post-change periods than in the pre-change periods. These results suggest that a choice made for external financial reporting purposes influences managers’ capital investment decisions.

In this study, we incorporate taxpayers' threat /opportunity perceptions into our analysis of taxpayer behavior in order to refine and extend our understanding of the internal cognitive forces that shape taxpayer behavior. Decision‐making frames (that is, the gain and loss domains from the prospect theory value function) and individual perceptions (that is, perceptions of decision alternatives as being threats or opportunities) are both likely to influence behavior, yet prior research has generally ignored the behavioral effects of individual perceptions. The results of our experiment reveal that taxpayers who are due a tax refund (owe additional taxes) prior to considering a judgemental tax deduction tend to perceive the conservative (aggressive) tax deduction to be more of an opportunity/less of a threat. In turn, we find that taxpayer frames have a direct effect on taxpayer behavior and an indirect effect on behavior through their effect on taxpayers' threat/opportunity perceptions. Perhaps the most important message of this study is that researchers can advance our understanding of the internal cognitive processes that shape taxpayer behavior by incorporating taxpayer perceptions into their research designs.

We study the interrelation between conservatism and earnings management by examining the allowance for uncollectible accounts and its income statement counterpart, bad debt expense. We find that the allowance is conservative and that it has become more conservative over time. Conservatism may, however, facilitate earnings management. We find that firms manage bad debt expense downward (and even record income‐increasing bad debt expense) to meet or beat analysts’ earnings forecasts and that conservatism accentuates the extent to which firms manage bad debt expense. Further, we find that firms manage bad debt expense downward by drawing down previously recorded over‐accruals of bad debt expense that have accumulated on the balance sheet. An implication of our study is that tighter limits on the amount by which firms are permitted to understate net assets may reduce their ability to manage earnings.

Theory suggests that debt financing, relative to equity financing, makes managers reluctant to part with assets. Our evidence supports this theoretical prediction, revealing that the reluctance to part with a debt financed asset causes two decision errors—(1) participants forego investments that increase firm value and (2) participants accept investments that decrease firm value. When the source of finance is equity, participants are less likely to make either of these costly decision errors. Further, we find that higher unpaid principal accentuates participants' reluctance to part with debt financed assets. Finally, the decision errors stem, in part, from the perception that an asset having a large unpaid principal balance has provided lower past benefits than an otherwise identical asset.

We hypothesize that managers use their hierarchical role as reviewers of accounting judgments and estimates to manage earnings, which we call indirect earnings management (IEM). Across a series of experiments using highly experienced financial executives as participants, we provide evidence that IEM (1) is likely used by managers to achieve current and future earnings targets, (2) reduces both cognitive dissonance associated with managing earnings and the extent to which managers think that their behaviors constitute earnings management, and (3) is more likely to be used when corporate governance is strong than when corporate governance is weak. The results of this study suggest new directions for future research on earnings management and highlight the important role of the hierarchical structure of the accounting function in efforts to understand how earnings are managed.