In this commentary on “Do features that associate managers with a message magnify investor's reactions to narrative disclosures?” by Asay, Libby, and Rennekamp (2018), I discuss issues regarding the experimental methods commonly used to study the effects of narrative financial disclosures. First, I suggest a broader view of the complementarity of experimental and archival research. Second, experimental methods provide an opportunity to design materials that use minimal representations of phenomena of interest or to use a broader, 360°, approach in depicting the phenomena; I argue the latter approach is a valid option. Third, I note concerns about the ubiquitous “process” or mediation testing in many financial accounting experiments. Fourth, I argue that the use of online participant population can be improved through better screening, to parallel the screening we use with student participant groups. Fifth, I summarize comments by conference participants that questioned the source of corporate disclosure style choices and investor style expectations. The paper concludes with a call for a framework to organize and understand the myriad of financial disclosure style choices made by firm management.

In evaluating the variance investigation decision made by a manager, information ex ante or ex post to the decision may have an impact. Although normative models generally consider only ex ante data, research on hindsight or outcome bias has shown that performance evaluations are often affected by decision outcomes. This outcome effect can be explained through the following cognitive links. First, the outcome of the investigation will have an impact on the perceived benefits of the investigation. Second, as posited by decision research on mental accounting, investigation expenditures matched with perceived benefits are framed as costs while those without perceived benefits are framed as losses. Third, evaluators with a cost frame provide higher performance ratings than those with a loss frame. A series of experiments with students and members of the Institute of Management Accountants demonstrates that managers making variance investigation decisions were evaluated more favorably when investigations revealed problems in the system. This is the well-known outcome effect. Further, the investigation outcome affected the perceived benefits from the investigation and, as predicted by mental accounting, expenditures with perceived benefits were framed as costs while those without perceived benefits were framed as losses. Finally, these frames affected performance evaluation as predicted. Thus, the outcome effect on performance evaluation can now be understood within a framework that includes the cognitive impact of mental accounting and framing. Surveys report that 85 percent of large U.S. manufacturing companies use standard costing systems (Cress and Pettijohn 1985; Gaumnitz and Kollaritsch 1988). Standard costing is particularly useful for managerial control purposes since variances from standards can be calculated for management use (Horngren and Foster 1987). At that point, managers must decide whether to collect more information regarding the performance reflected in the variances. Mathematical models have been formulated to analyze this variance investigation decision (e.g., see Kaplan 1969; Jacobs and Marshall 1984). Although these mathematical models provide normative or optimal prescriptions for the variance investigation decision, managers may not follow the recommendations of the models if their decisions are judged using criteria unrelated to the models (Magee 1976). Research on human information processing and decision making has shown that judgments are affected by outcomes (or hindsight) and mental accounting (a form of decision framing). If the managerial evaluations are affected by these phenomena, managerial actions will be effected by their potential impact. This study investigates the effects of outcomes and framing on the evaluations of managers responsible for the variance investigation decision. Specifically, it develops a cognitive mechanism for the impact of outcomes on such evaluations using prior results and ideas from judgment and decision making research. Although the impact of hindsight and outcomes has been demonstrated in prior work in accounting (Helleloid 1988; Brown and Solomon 1987), a satisfactory cognitive explanation for the effect remains elusive (but, see Brown and Solomon 1991). Thus, the contribution of the present study is in the development and testing of this cognitive mechanism.

[In evaluating the variance investigation decision made by a manager, information ex ante or ex post to the decision may have an impact. Although normative models generally consider only ex ante data, research on hindsight or outcome bias has shown that performance evaluations are often affected by decision outcomes. This outcome effect can be explained through the following cognitive links. First, the outcome of the investigation will have an impact on the perceived benefits of the investigation. Second, as posited by decision research on mental accounting, investigation expenditures matched with perceived benefits are framed as costs while those without perceived benefits are framed as losses. Third, evaluators with a cost frame provide higher performance ratings than those with a loss frame. A series of experiments with students and members of the Institute of Management Accountants demonstrates that managers making variance investigation decisions were evaluated more favorably when investigations revealed problems in the system. This is the well-known outcome effect. Further, the investigation outcome affected the perceived benefits from the investigation and, as predicted by mental accounting, expenditures with perceived benefits were framed as costs while those without perceived benefits were framed as losses. Finally, these frames affected performance evaluation as predicted. Thus, the outcome effect on performance evaluation can now be understood within a framework that includes the cognitive impact of mental accounting and framing. Surveys report that 85 percent of large U.S. manufacturing companies use standard costing systems (Cress and Pettijohn 1985; Gaumnitz and Kollaritsch 1988). Standard costing is particularly useful for managerial control purposes since variances from standards can be calculated for management use (Horngren and Foster 1987). At that point, managers must decide whether to collect more information regarding the performance reflected in the variances. Mathematical models have been formulated to analyze this variance investigation decision (e.g., see Kaplan 1969; Jacobs and Marshall 1984). Although these mathematical models provide normative or optimal prescriptions for the variance investigation decision, managers may not follow the recommendations of the models if their decisions are judged using criteria unrelated to the models (Magee 1976). Research on human information processing and decision making has shown that judgments are affected by outcomes (or hindsight) and mental accounting (a form of decision framing). If the managerial evaluations are affected by these phenomena, managerial actions will be effected by their potential impact. This study investigates the effects of outcomes and framing on the evaluations of managers responsible for the variance investigation decision. Specifically, it develops a cognitive mechanism for the impact of outcomes on such evaluations using prior results and ideas from judgment and decision making research. Although the impact of hindsight and outcomes has been demonstrated in prior work in accounting (Helleloid 1988; Brown and Solomon 1987), a satisfactory cognitive explanation for the effect remains elusive (but, see Brown and Solomon 1991). Thus, the contribution of the present study is in the development and testing of this cognitive mechanism.]

Although prior research reports that firms that consistently beat their earnings expectations are rewarded with a market‐valuation premium, most firms are inconsistent in the sign of their benchmark performance, sometimes missing and sometimes beating. In this paper, we report the results of multiple experiments to test the idea that potential investors, evaluating firms that have inconsistent benchmark performance, use a counting heuristic to discriminate among them. Our results provide strong support for the hypothesis that these investors distinguish among firms by counting the number of beats and misses they experience over an observed time interval. The judgmental effect of this beat‐frequency is incremental to the effect of the magnitude of the beats and misses of the benchmark. Our study has implications for firm managers who have inconsistent benchmark performance, suggesting that market participants do make systematic discriminations among such inconsistent firms. It also has implications for researchers by introducing a new theoretical construct to the literature—namely, the counting heuristic.

Archival research shows that the market reacts to earnings trend as well as to earnings performance relative to analysts' forecasts (i.e., benchmark performance). We conduct four experiments to investigate how and why investors react to these two measures when both are available over multiple time periods. Our results show that investors rely on an earnings measure only when it is consistent over time. When both measures are consistent over time, investors use them in an additive fashion, suggesting that they view them as providing different information about the firm. Further tests show that investors believe that earnings trend and benchmark performance both provide information about a firm's future prospects and management's credibility. Although judged future prospects fully explain the effect of earnings trend on investor judgments, neither judged future prospects nor management credibility completely explains the effect of benchmark performance. Our study has implications for firm managers and researchers.

Research methodology, Laboratory studies, Incentives, Effort

The balanced scorecard is a new tool that complements traditional measures of business unit performance. The scorecard contains a diverse set of performance measures, including financial performance, customer relations, internal business processes, and learning and growth. Advocates of the balanced scorecard suggest that each unit in the organization should develop and use its own scorecard, choosing measures that capture the unit's business strategy. Our study examines judgmental effects of the balanced scorecard—specifically, how balanced scorecards that include some measures common to multiple units and other measures that are unique to a particular unit affect superiors' evaluations of that unit's performance. Our test shows that only the common measures affect the superiors' evaluations. We discuss the implications of this result for research and practice.

Information that firms provide about financial instruments and derivatives should help investors judge risk. However, this paper reports that such information often is not effective for this purpose. Through a series of experiments, we demonstrate that the labels firms use to describe financial instruments and derivatives cause investors to assess economically equivalent instruments as different in terms of risk. We also show that loss-only disclosures that companies use to describe their risks cause investors to assess the same level of risk for firms with differing underlying exposures. Moreover, we establish that loss-only disclosures cause investors to make risk judgments that correspond to infrequently used risk-management strategies. We test two possible remedies for these judgment problems. Our results show that additional information describing the underlying economic exposures of a financial instrument does not eliminate the labeling effects. However, we do find that providing investors with upside and downside (i.e., two-sided) risk disclosures help them distinguish among firms using different risk-management strategies.