This article presents information on cognitive factors in accounting. Of particular interest to accountants is the possibility that the cognitive characteristics of an information user may affect his perception of what information is important and, hence, may affect how information influences his ultimate behavior. There is considerable support in the psychological literature on human information processing for the existence of such relationships. This paper describes a field study in which the applicability of some of these findings to the administrative information system domain was investigated. The objective of the study was to determine if the cognitive characteristics of a manager affect his perceptions of what information is important to performing his job role. The cognitive characteristic selected for investigation in this study was the level of an individual's intolerance of ambiguity. Its selection was motivated by the fact that it is conceptually related to both dogmatism and integrative complexity, which were the cognitive variables employed in the psychological studies of information processing cited above, and also is a variable of potential significance to accountants in its own right.

To many accountants depreciation as we know it today represents an idea which is a generally accepted accounting principle. Business has not always had such respect for depreciation accounting. This article has as its goal a highlight review of some of the interesting changes, which have occurred in the development of this accounting concept. The idea of depreciation was not clearly established by the latter part of the nineteenth century. In 1876, the United States Supreme Court stated, in referring to the determination of the profit of a merchant, that it was unusual to take into account depreciation on a building in which a merchant maintained his business. In 1878, the United States Supreme Court criticized the practice of establishing depreciation reserves through periodic charges to operating expense, and held that only the actual expenses of renewals could be charged to operating expense. The idea as expressed by the Supreme Court was apparently the common thinking of business leaders, for the Third National Convention of Railroad Commissioners in 1879 adopted a report on uniform accounts which included the following instruction no expenditure is chargeable for an actual increase though unless it is made on old work in such a way as to clearly increase the value of the property over and above the cost of renewing the original structures. Corollary to this idea was the thought that if property were properly maintained there would be no depreciation.

Applying a Burgstahler and Dichev (1997)/Degeorge et al. (1999) type methodology to quarterly data for the 1985–2002 time period, we show that, since the mid-1990s, but not before then, managers seek to avoid negative quarterly earnings surprises more than to avoid either quarterly losses or quarterly earnings decreases. Our findings suggest that the quarterly earnings threshold hierarchy proposed by Degeorge et al. (1999) does not apply to recent years, and that managers' claim that avoiding quarterly earnings decreases is the threshold they most seek to achieve (Graham et al. 2004) is inconsistent with their actions. We provide an intuitively appealing economic rationale for why the shift in threshold hierarchy occurred; since the mid-1990s, but not before then, investors unambiguously rewarded (penalized) firms for reporting quarterly earnings meeting (missing) analysts' estimates more than they did for meeting (missing) the other two thresholds. We provide several explanations for why investors unambiguously reward firms for reporting quarterly earnings that meet or beat analysts' estimates more than for meeting the other two thresholds late (but not early) in our sample period: increased media coverage given to analyst forecasts, more analyst following, more firms covered by analysts, and temporal increases in both the accuracy and precision of analyst forecasts.

I examine how mandatory position disclosure of claimholders’ economic interests affects Chapter 11 bankruptcy outcomes. Exploiting a regulation that increased disclosure by creditors and equityholders on certain committees, I find that position disclosure is associated with a decrease in the length of bankruptcy cases, especially the duration of negotiations between claimholders across classes. Further, I show that position disclosure is associated with lower post-bankruptcy recidivism. Contrary to the concerns expressed by critics, I find little evidence that position disclosure reduced claimholders’ participation in committees or decreased trading in the market for bankruptcy claims. My findings highlight the overall benefits of position disclosure in facilitating negotiations during bankruptcy. Data Availability: Data are available from the public sources cited in the text.

I study productive activity, measurement, and compensation in a principal agent model that relaxes common restrictions on the action set of the agent, the distribution of performance measures, and the shape of the wage schedule. The solution to this relaxed problem unifies insights from extant theory and shares features with well-known empirical phenomena. In particular, the optimal outcome distribution has a kink, optimal measurement is conservative, and optimal wages ensure congruent incentives and resemble accounting-based bonus plans featuring a floor, hurdle bonus, incentive zone, and ceiling, with thresholds that may reference other performance measures. Beyond these specific insights, the paper provides a flexible framework for studying how incentives are shaped through measurement and contracts.

This study provides evidence that hyperlinking a firm's audited financial statements to unaudited information in a web-based environment leads investors to blend the unaudited information with the audited statements. I obtain evidence of this blending effect using an experiment where investors assessed a firm's earnings potential by evaluating the firm's audited financial statements and a subsequent optimistic unaudited letter to shareholders from the firm's management. Investors who viewed hyperlinked materials on the Web misclassified more unaudited information as audited and assessed the credibility of the unaudited information as higher than did investors who viewed hardcopy materials. Those investors who assessed the unaudited information as more credible also judged the firm's earnings potential to be higher. Notifying users with an “AUDITED/NOT AUDITED” label attenuated these effects. This evidence suggests that firms can influence financial report users' perceptions by hyperlinking unaudited information to information in their audited financial statements, and that a simple disclosure rule reduces this influence.

Examines the influence of annual earnings announcements on financial forecasts. Convergence of beliefs; Earnings surprise; Suggestion that annual earnings announcement should increase the convergence of analysts' forecasts of future earnings.

The SEC requires public companies to disclose material information on Form 8-K within four days of a triggering event. We show that on 8-K event and filing dates, there is significant abnormal attention on Bloomberg terminals, which are a source of information for institutional investors, while traditional media attention tends to be higher on filing days. Significant price discovery occurs on the event date and on the days between that day and the filing date. The traditional media coverage on the filing day appears to attract the attention of retail investors and leads to further price changes in the direction of the pre-filing day price change. Institutional investors exploit this price pressure via opportunistic liquidity provision. Overall, our evidence suggests that the Form 8-K filing may have little direct informational benefit, particularly to retail investors.

Corporate investment decisions require managers to forecast expected future cash flows from potential investments. Although these forecasts are a critical component of successful investing, they are not directly observable by external stakeholders. In this study, we investigate whether the quality of managers' externally reported earnings forecasts can be used to infer the quality of their corporate investment decisions. Relying on the intuition that managers draw on similar skills when generating external earnings forecasts and internal payoff forecasts for their investment decisions, we predict that managers with higher quality external earnings forecasts make better investment decisions. Consistent with our prediction, we find that forecasting quality is positively associated with the quality of both acquisition and capital expenditure decisions. Our evidence suggests that externally observed forecasting quality can be used to infer the quality of capital budgeting decisions within firms.

We formulate and test the hypothesis that nonearnings disclosures of small, but not large, firms generally are "good news." Nonearnings disclosures are defined as disclosures by managers and outsiders about news other than earnings (e.g., stock splits, takeovers, new orders). "Good news" is defined as a positive stock price reaction at the time of the information disclosure. Our hypothesis is motivated by two lines of prior research. First, managers have incentives to disclose their private information voluntarily when they expect the effects of the information on firm value to exceed the disclosure costs (Verrecchia 19831. Second, the "firm-size differential information hypothesis," advanced by Atiase (1980, 1985) and the corroborating empirical evidence of Atiase (1985, 1987), Freeman (1987), and Bhushan (1989) suggest that incentives for information production and dissemination by outsiders are an increasing function of firm size. Thus, assuming that nonearnings disclosures concerning small firms are initiated primarily by managers, whereas those of large firms are not, small (but not large) firms' nonearnings disclosures are more likely to be good rather than bad news. Using firm-specific nonearnings disclosures, identified from the Dow Jones News Retrieval Service data base over the 1982 to 1987 period, we show that small firms' nonearnings disclosures, on average, are associated with significant stock price increases, whereas large firms' nonearnings disclosures, on average, are valuation-neutral. Given these results and the evidence that nonearnings disclosures are often made around the time of earnings announcements (Hoskin et al. 1986; Thompson et al. 1987), we reexamine the puzzling result of Chari et al. (1988) that on-time earnings announcements of small, but not large, firms are associated with positive abnormal returns, unconditional upon the nature of the earnings news. We hypothesize that this phenomenon is attributable to nonearnings disclosures of good news around the time of small firms' earnings announcements. We show that small and large firms' "pure" on-time earnings announcements are not associated with positive abnormal returns, and that small (but not large) firms' "contaminated" on-time earnings announcements are associated with positive abnormal returns. We conclude that the Chari et al. (1988) results do not pertain to small firms' on-time earnings announcements per se, but to those that are accompanied by nonearnings news.