We conduct an experiment to examine the effects of guidance frequency (frequent vs. infrequent) and guidance goal (accuracy vs. meet/beat vs. truthful) on managers’ operating decisions. We find that frequent guiders sacrifice total earnings for quarterly earnings predictability irrespective of their guidance goals. Furthermore, when guidance is infrequent, guiders with accuracy goals opt for quarterly earnings predictability over total earnings more often than do guiders with either meet/beat goals or truthful goals. These findings have implications for regulators and investors in terms of the unintended consequences of requesting frequent earnings guidance. Further, while managers may perceive that accuracy goals can help their firms establish forecasting and reporting reputations, we show that accuracy goals may result in dysfunctional internal managerial decisions, particularly when guidance is issued infrequently.

In a globalized audit environment, regulators and researchers have expressed concerns about inconsistent audit quality across nations, with a particular emphasis on Chinese audit quality. Prior research suggests Chinese audit quality may be lower than U.S. audit quality due to a weaker institutional environment (e.g., lower litigation and inspection risk) or cultural value differences (e.g., greater deference to authority). In this study, we propose that lower Chinese audit quality could also be due to Chinese auditors' different cognitive processing styles (i.e., cultural mindsets). We find U.S. auditors are more likely to engage in an analytic mindset approach, focusing on a subset of disconfirming information, whereas Chinese auditors are more likely to take a holistic mindset approach, focusing on a balanced set of confirming and disconfirming information. As a result, Chinese auditors make less skeptical judgments compared to U.S. auditors. We then propose an intervention in which we explicitly instruct auditors to consider using both a holistic and an analytic mindset approach when evaluating evidence. We find this intervention minimizes differences between Chinese and U.S. auditors' judgments by shifting Chinese auditors' attention more towards disconfirming evidence, improving their professional skepticism, while not causing U.S. auditors to become less skeptical. Our study contributes to the auditing literature by identifying cultural mindset differences as a causal mechanism underlying lower professional skepticism levels among Chinese auditors compared to U.S. auditors and providing standard setters and firms with a potential solution that can be adapted to improve Chinese auditors' professional skepticism and reduce cross‐national auditor judgment differences.

Recent studies document that market participants react positively to the positive language sentiment or tone embedded in financial disclosures, and that investors’ reactions to negative news are more muted with poor disclosure readability. However, while language sentiment and readability co‐occur in practice, their joint effects remain largely unexplored. In an experiment with MBA students as participants, we investigate how the effect of language sentiment varies with readability and investor sophistication level. We find that language sentiment influences investors’ judgments when readability is low, but not when readability is high. Specifically, when readability is low, disclosures couched in positive language lead to higher earnings judgments for less sophisticated investors, but lower earnings judgments for more sophisticated investors. These findings show that the main effects of readability and language sentiment documented in prior studies have boundary effects, and may reverse when both variables are jointly considered along with investor sophistication.

We experimentally investigate how jargon affects investment willingness for investors with different industry knowledge, and whether such effects vary with good or bad jargon. We find that for investors without industry knowledge, jargon decreases investment willingness because it decreases understanding. However, for investors with some but low industry knowledge, jargon increases investment willingness because it increases perceived product premium. Such effects exist whether good or bad jargon is used. Finally, investors with high industry knowledge differentiate between good and bad jargon, and reduce investment willingness only when bad jargon is used. These findings have implications for regulators, managers, and investors.

We conduct two experiments to investigate how readability (high versus low) and benchmark performance consistency (consistent versus inconsistent) influence investors' judgments. Using prior management guidance and year-ago quarter performance as two benchmarks against which to assess actual earnings performance, we manipulate whether the valence of guidance performance (positive or negative) and the valence of trend performance (positive or negative) are consistent with each other. We also manipulate the readability of trend performance in our main experiment. Our results show that when benchmark performance is inconsistent, higher as opposed to lower readability of positive (negative) trend performance leads to more (less) favorable investors' performance judgments. This effect of readability is smaller when benchmark performance is consistent. We also show that higher readability in the inconsistent benchmark performance condition improves investors' understanding of the firm's current-quarter performance, which in turn influences their judgments on the firm's future performance. In a supplementary experiment, we manipulate the readability of guidance performance in an inconsistent benchmark performance setting, and replicate the key finding that higher readability of positive guidance performance leads to more positive judgment on the firm's future performance.

We conduct two experiments with experienced accountants to investigate how fair value accounting affects managers’ real economic decisions. In experiment 1, we find that participants are more likely to make suboptimal decisions (e.g., forgo economically sound hedging opportunities) when both the economic and fair value accounting impact information is presented than when only the economic impact information is presented, or when both the economic and historical cost accounting impact information is presented. This adverse effect of fair value accounting is more likely when the price volatility of the hedged asset is higher, which is a situation where, paradoxically, hedging is more beneficial. We find that the effect is mediated by participants’ relative considerations of economic factors versus accounting factors (e.g., earnings volatility). Experiment 2 shows that enhancing salience of economic information or separately presenting net income not from fair value remeasurements reduces the adverse effect of fair value accounting. Our findings are informative to standard setters in their debate on the efficacy of fair value accounting.

We investigate whether and how a “critical audit matter” (CAM) disclosure affects managers' real operating decisions in two contexts (issuing a loan that decreases versus increases the average risk profile of loan portfolios, or choosing to hedge versus speculate on commodity risk). We expect that a CAM disclosure increases disclosure costs and implies expanded auditor support for both types of activities, but we expect implied auditor support to be valued more highly for risk-increasing than for risk-decreasing activities. As a result, we predict that a CAM disclosure decreases managers' risk-decreasing activities (due to increased disclosure costs) more than managers' risk-increasing activities (as the implied auditor support counteracts the increased disclosure costs). We find evidence consistent with our prediction across multiple experiments. Our study sheds light on the unintended consequences of a CAM disclosure and provides insight to relevant parties as the new standard goes into effect.

Informed by Perceptual Deterrence Theory, we conduct multiple experiments to investigate when and how auditor actions can help deter manager opportunism. In Study 1A, we find that managers are less likely to use real earnings management (REM) when they expect auditors to both increase scrutiny and communicate their observations to the board. However, this effect occurs only when managers' operational decisions are inconsistent (versus consistent) with peer behavior. Study 1B findings suggest that increased auditor scrutiny alone (without auditor-board communication) is not likely to deter REM. In Study 2, we find that increased auditor scrutiny with communication to the board effectively deters both accruals-based earnings management (AEM) and REM, reducing the total level of manager opportunism. However, without communication, increased auditor scrutiny deters AEM, but also induces more REM. Our findings highlight the importance of auditor-board communication and demonstrate how auditor actions can contribute to the deterrence of manager opportunism. Data Availability: Contact the authors.