This study complements and extends prior decision aid (DA) research by examining the DA reliance behavior of professional buy-side financial analysts in the context of their actual work environment. A large mutual fund company provided data on buy-side analysts' earnings forecasts over the course of one year, during which forecasts were made at the end of each quarter for the following four consecutive quarters. As part of the decision process, all analysts could voluntarily access a DA to assist them in forecasting earnings. Consistent with extant DA theory, the results indicate that analysts with greater performance-contingent incentives were less likely to rely on the DA and analysts with more complex portfolios were more likely to rely on the DA. Contrary to the results of most DA research and inconsistent with extant DA theory, analysts with greater task ability relied more on the DA than analysts with lesser ability. Finally, when DA reliance was high, analysts' forecast accuracy was also high, regardless of DA accuracy. The results provide valuable insight into the use of DAs by professional decision makers and the influence of DA reliance on their judgments in light of real-world pressures and performance consequences. The theoretical and practical implications of this study call for more research into why, how, and under what conditions highly skilled knowledge workers rely on the advice of DAs.

The current study examines the outcomes of three fraud brainstorming procedures—nominal group, round robin, and open discussion—via a randomized between-participant field experiment involving 150 audit clients and 2,614 auditors who participated in natural, hierarchical audit teams. The results indicate that nominal group and round robin brainstorming resulted in equivalent numbers of unique fraud risks and comparable increases in planned audit hours, while open discussion brainstorming yielded the least number of unique ideas and the smallest increase in planned audit hours. Furthermore, nominal group and round robin brainstorming yielded more changes/additions to the nature and timing of substantive testing than open discussion brainstorming. Study findings offer theoretical and practical insight into fraud brainstorming.

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.

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.