Thomas R. Dyckman, Observations on Jensen's Experimental Design for Study of Effects of Accounting Variations in Decision Making, Journal of Accounting Research, Vol. 5, No. 2 (Autumn, 1967), pp. 221-229
The article comments on various studies related to the effects of restating financial statements for price-level changes. The three behavioral studies referenced all presented "decision makers" with different sets of data and attempted to infer the effect of these presentations on investment-related decision behavior. The author's study finds that different information sets produced different decisions as to investment preferences. To evaluate the importance of these differences one must evaluate the behavioral research. First, the author lists the differences among the three studies of decision behavior at the individual level that are important in evaluating the conclusions reached. The discussion then turns to a detailed examination of the experimental designs used, together with their inherent limitations. The discussion of design concentrates on the subject-selection process and the subject's task assignment. There are those who would argue that the question of whether or not to restate financial reports for price-level changes is only a question of logic or theory. An accountant's assumption of a stable measuring unit, the dollar, is clearly not met, and, subject to obtaining the best measure of this change, logic dictates that the measure should be corrected.
The article informs that in a recent article in this journal professor Harold Bierman suggests that under some conditions, price-level adjustments may be less useful for purposes of decision making than the historical cost data. Bierman relies on the notion of economic depreciation which yields an asset value equal to the discounted expected future cash flows attributable to an asset. He then illustrates that if the discount rate is adjusted to reflect expected inflation, the use of economic depreciation leads to an asset value at time t precisely equivalent to the present value of the expected future cash flows under inflation at time t. Bierman then shows that if an additional adjustment for price-level change is made to the discounted value of the asset, an incorrect asset valuation is obtained. It is useful to explore the effects of Bierman's suggestions on the income statement in terms of their potential implications for decisions. Finally, one should ask about the economic significance of these results under what is known about the actions of the market and individuals in the market.
Some of the business problems involve determining the problem and the alternatives, obtaining the information relevant to the problem's resolution, establishing where the required information can be obtained, selecting the appropriate methods of analysis or synthesis, considering the problem and the limitations of the information and preparing the results of the investigation for dissemination. The dynamic case approach seemed especially suited to studying these and related, subsidiary issues. This method was therefore employed on an experimental basis in the undergraduate, management cost accounting course at the University of California, Berkeley. In conclusion, the author had been greatly impressed with the pedagogical potentialities of the dynamic case in management accounting courses. Although no empirical evidence can be offered to substantiate a claim of greater efficiency in the learning process the author nevertheless believes it to be the case. And the use of the dynamic case possibly integrated with the business game in an expanded form to cover the other business areas, would seem to be an ideal means of integrating a student's knowledge prior to graduation.
A market economy is characterized by a high degree of individual freedom over a wide range of economic activities. Individuals, the implementers of such activity, are, within a broad framework of legal and social constraints, free, singly or in consort, to enter or exit from enterprises of their choice. Further, they are largely free to distribute the resources they possess among alternative employments. Yet, because these resources are scarce and often versatile, any attempt to maximize their long- run contribution to society involves an allocation problem. Each resource holder making decisions regarding the timing and the employment of each resource held effectuates the allocation task. To achieve rational decisions it is reasonable to assume that the individual resource holder will have need for the factual data necessary to delineate and evaluate various alternatives. Commonly, in the case of capital, the resource allocation procedure will pass through several stages with the final step being the selection of an investment opportunity by individuals acting collectively.
The article discusses efficient market empirical research literature in relation to accounting information. The studies discussed in the article questioned the frictionless nature of the hypothesis as usually expressed. The authors believe that efficient-markets research in relation to financial accounting is the most important thrust made by accounting researchers in the past decade. By its very nature, empirical research is time consuming and messy. Furthermore, conclusions are always subject to reservations.