Kelleyschool of Business

indianauniversity

KELLEYSCHOOL OF BUSINESS

DEPARTMENT OF ACCOUNTING

A602: EXPERIMENTAL RESEARCH IN ACCOUNTING

Spring Semester 2003

Laureen A. Maines

BU 530B

855-2611

Office hours by appointment

COURSE INFORMATION:

Meeting times:Tuesday and Thursday, 1:00 – 4:00 p.m.

Room:BU550 Seminar Room

COURSE OBJECTIVES:

A602 is a six credit hour Ph.D.-level course on experimental research in accounting. The overall objective of the course is to provide students with the tools needed for educated consumption and production of experimental research in accounting. In the course, we will focus on the theoretical and methodological issues faced by those who conduct this research, as well as the practical implications of the research for accounting. Students should leave the course with a basic knowledge of experimental research in accounting and be better able to create, analyze, and critique such research. The course also should help those students intending to work in the experimental area identify dissertation (research) topics.

The course will be divided in four parts. The first part will consist of several sessions that provide an overview of experimental research in accounting and the theoretical foundations for this research. The remaining three sections cover experimental research focusing on (1) individual judgment and decisions, (2) multi-person interactions, and (3) market behavior. Joe Fisher, Peggy Hite, Jamie Pratt, and Geoff Sprinkle also will lead one session each that focuses on his/her respective research area.

COURSE REQUIREMENTS:

In general, each class period will focus on discussion of two or three papers. I believe the best approach to understanding the experimental literature in accounting is to analyze thoroughly papers in the area. In addition to the two or three papers per session, there will be background readings for some sessions (denoted with "B" in the list of reading assignments). These readings are mandatory but typically will not be discussed in depth in class.

For each research paper, one student will serve as the primary discussant and the other students will serve as secondary discussants. Secondary discussants are required to read the paper and be prepared to engage in class discussion. In addition to these requirements, the primary discussant will provide a written summary of the paper for the other class members and lead class discussion (bring copies of your summary for all class members). These tasks involve taking both an advocate and critic perspective, i.e., assessing the contribution of the paper, as well as the problems and potential solutions to those problems. I will provide more specific instructions on the format for the paper summaries in a separate handout.

COURSE MATERIALS:

Readings will be distributed in class.

GRADES:

I have designed the grading in A602 to reflect some of the knowledge and skills you need to be successful in the academic accounting profession. These include: (1) the ability to express your thoughts clearly and concisely both orally and in writing, helping others gain knowledge in the process, (2) knowledge of theoretical and empirical literature, (3) the ability to evaluate the quality of research papers, and (4) the ability to create discovery research.

The following table summarizes allocations for components of the course grade:

Requirement / Percentage
Participation and Paper Summaries / 30%
Final Exam / 30%
Paper Review / 10%
Research Paper / 30%
Total / 100%

Participation and paper summaries: Participation and paper summaries consist of your participation in class discussion for all papers and your written summaries for the papers for which you are the primary discussant.

Final exam: The final examination will be similar in scope and difficulty to the comprehensive examination you will take at the end of your second or third year, except that it will cover only the contents of this course. The exam will be 3 hours in length and will be closed book. We will arrange for a mutually convenient time during final exam week.

Paper review: You are required to perform a formal review of a working paper, i.e., a review similar to those you will be doing for journals in the future. I will give you the paper on February 18 and your review will be due on March 4. I will provide you with guidelines from The Accounting Review to help you in the review process.

Research paper: You are required to write a paper for a research project that involves the experimental analysis of an accounting issue. As you will learn, simplicity (as well as elegance and cleverness) is a virtue in experimental design. Thus, I suggest that you keep your ideas simple. The purpose of the project is to provide insights into the problems that researchers face when attempting to examine even simple ideas experimentally, and thus enhance your ability to understand and evaluate the literature. It is often the case that experimental ideas sound great until you try to implement them. Accordingly, another requirement is that you draft the actual experimental instrument that you would use if you were to carry out the study. Your project will include the following:

(1) A paper, with an introduction, theory/background/hypotheses section, method section, and conclusions/implications assuming your results would turn out as hypothesized. The paper should be in the range of 15 – 20 double-spaced pages.

(2) An experimental instrument, including the task, manipulation check and dependent

measure questions, and demographic, etc. questions.

You should meet with me once you have a potential project idea. You must turn in a brief description of the project and have approval by Tuesday, March 25. Additionally, by the last week of class (Tuesday, April 29 and Thursday, May 1), you must be sufficiently far along in the project to provide other class members with a short paper discussing your project and to engage in a substantive (at least one-hour) discussion of the project with class members. I realize that some of you will not complete the paper by the end of the course; however, all papers must be completed by the end of May 2003. No exceptions will be made to this deadline. Finally, similar to what you will face in the editorial process, it is highly likely that you will have to revise the paper at least once after submitting it.

(The following individuals generously provided syllabi for similar Ph.D. courses which greatly aided in the construction of this syllabus: Mike Bamber, Stan Biggs, Rob Bloomfield, Sarah Bonner, Vicky Hoffman, Jane Kennedy, Lisa Koonce, Bob Libby, Marlys Lipe, Joan Luft, Don Moser, Mark Nelson, Mark Peecher, Mike Shields, and Rick Tubbs).

SCHEDULE

Date / Topic / Assignment

INTRODUCTION AND OVERVIEW

Jan 14 (T) / Overview of experimental research in accounting; why use experiments to study accounting issues / Sprinkle/Maines notes 2002
Libby 1981, Chapter 1
Ashton and Ashton 1995
Bonner 1999
Kachelmeier and King 2002
Jan 16 (R) / Theoretical foundations for experimental research in accounting / Hogarth 1993
Lopes 1994
Hastie 2001
Shafir and LeBoeuf 2002
Camerer and Loewenstein 2002
Jan 21 (T) / Experimental design
Research issues
(Class will start at 1:30 p.m.) / Keppel 1991, pp. 3-20
Keppel 1991, pp. 187-221
Peecher and Solomon 2001
Libby, Bloomfield, Nelson 2002, section 4

INDIVIDUAL JUDGMENTS AND DECISIONS

EFFECTS OF DECISION-MAKER AND INFORMATION CHARACTERISTICS

Jan 23 (R) / Measuring JDM quality and modeling JDM / Libby 1981, Chapter 2 excerpt (B)
Libby 1975
Ashton 1982
Davis, Kennedy, and Maines 2000
Jan 28 (T) / Decision-maker characteristics – experience, knowledge, abilities / Libby and Luft 1993 (B)
Bonner and Lewis 1990 (plus Marchant 1990)
Vera-Munoz, Kinney, and Bonner 2001
Tan and Libby 1997
Jan 30 (R) / Decision maker characteristics – processing / Hunton and McEwen 1997
Cuccia and McGill 2000
Frederickson and Miller 2002
Feb 4 (T) / Information characteristics -
the role of classification, framing, and format in facilitating decisions
DOUBLE CLASS (1:00 p.m. – 7:00 p.m.) / Libby, Bloomfield, Nelson 2002
sections 1 – 3.2.6 (B)
Hopkins 1996
Luft and Shields 2001
Maines and McDaniel 2000
Hirst, Hopkins, and Wahlen 2002
Koonce, Lipe, and McAnally 2002
Feb 6 (R) / No class
Feb 11 (T) / Audit Risk Pricing
Jamie Pratt / Houston, Peters, and Pratt 1999
Barron, Pratt, and Stice 2001
Houston, Peters, and Pratt 2002
Feb 13 (R) / Information characteristics – the role of format in dealing with information complexity / Lipe and Salterio 2000
Lipe and Salterio 2002
Hirst, Jackson, and Koonce 2003
Feb 18 (T) / Information characteristics – issues related to voluntary disclosures / Tan, Libby and Hunton 2002 (B)
Libby, Tan, and Hunton 2002
Mercer 2002
Feb 20 (R) / Information characteristics - issues related to voluntary disclosures / Kennedy, Mitchell, and Sefcik 1998
Krische 2002
Sedor 2002
Feb 25 (T) / Individuals’ interpretation of information and task characteristics – motivated reasoning / Cuccia, Hackenbrack, and Nelson 1995
Nelson, Elliott, and Tarpley 2002
Phillips 2002

MULTI-PERSON INTERACTIONS

EFFECTS OF ACCOUNTABILITY, INCENTIVES, AND GROUPS

Feb 27 (R) / Consideration of the opinions, judgments, and decisions of others – accountability and herding / Kennedy 1993 (B)
Kennedy 1995
Peecher 1996
Cote and Sanders 1996
Mar 4 (T) / Overview of experimental research based on economic (agency) theory - decision-influencing role of managerial accounting information
Geoff Sprinkle / Moser 1998 (B)
Luft and Shields 2003
Sprinkle 2003
Mar 6 (R) / Are individuals opportunistic (do agency problems exist)? / Baiman and Lewis 1989 (B)
Berg, Daley, Dickhaut and O'Brien 1992
Evans, Hannan, Krishnan and Moser 2001
Mar 11 (T) / Managerial accounting practices and procedures related to adverse selection / Chow 1983
Waller and Chow 1985
Young 1985
Mar 13 (R) / Managerial accounting practices and procedures related to moral hazard / Bonner, Hastie, Sprinkle and Young 2000 Bonner and Sprinkle 2002
Mar 18 & 20 / No class – Spring Break
Mar 25 (T) / Managerial accounting practices and procedures related to moral hazard / Luft 1994
Frederickson 1992
Mar 27 (R) / Experimental research in tax
Peggy Hite / Cloyd, Pratt, and Stock 1996
Hite 2002
Hite and Hasseldine 2002
McCaffery and Baron 2002
Apr 1 (T) / Effect of incentives on learning and innovation (implications of decision-influencing role of managerial accounting for decision facilitation) / Sprinkle 2000
Drake, Haka, and Ravenscroft 1999
Apr 3 (R) / Teams / Group affiliation / King 2002
Sprinkle, Peffer, and Fisher 2002
Towry 2002

MARKET LEVEL BEHAVIOR

Apr 8 (T) / Introduction to experimental research using laboratory markets / Davis and Holt, Chpt 1 (B)
Bloomfield 2002 (B)
Sunder 2002 (B)
Camerer, Loewenstein, and Weber 1989
Apr 10 (R) / Market efficiency – does the market eliminate biases? / Anderson and Sunder 1995
Tuttle, Coller, and Burton 1997
Waller, Shapiro and Sevcik 1999
April 15 (T) / Negotiation research
Joe Fisher / Rubin and Brown
Murnighan and Bazerman 1990 (B)
Chalos and Haka 1990
Fisher, Frederickson, and Peffer 2000
Kachelmeier and Towry 2002
April 17 (R) / Market efficiency – disclosure / Coller 1996 (B)
King and Wallin 1995
Bloomfield 1996
Dietrich, Kachelmeier, Kleinmuntz, and
Linsmeier 2001
April 22 (T) / Market efficiency – under- and over-reactions to information / Lundholm 1991 (B)
Calegari and Fargher 1997
Bloomfield, Libby, and Nelson 2000
Bloomfield, Libby, and Nelson 2003 (plus Hopkins discussion)
April 24 (R) / Reputation formation in markets / King 1996
Mayhew 2001
April 29 (T) / Project discussion
May 1 (R) / Project discussion
Week of
May 5 / Final Exam: Time to be arranged during final exam week

READINGS

Anderson, M. J. and S. Sunder. (1995). Professional traders as intuitive Bayesians. Organizational Behavior and Human Decision Processes. 64: 185-203.

Ashton, A. (1982). An empirical study of budget-related predictions of corporate executives. Journal of Accounting Research 20 (2): 440 - 449.

Ashton, R.H. and A.H. Ashton. (1995). Perspectives on judgment and decision-making research in accounting and auditing. In A.H. Ashton and R.H. Ashton (Eds.) Judgment and Decision–Making Research in Accounting and Auditing. CambridgeUniversity Press. 102-136.

Baiman, S. and Lewis, B.L. (1989). An experiment testing the behavioral equivalence of strategically equivalent employment contracts. Journal of Accounting Research, 27, 1-20.

Baron, O., J. Pratt, and J. D. Stice. 2001. Misstatement direction, litigation risk, and planned audit investment. Journal of Accounting Research 39 (December): 449-462.

Berg, J.E., Daley, L.A., Dickhaut, J.W., and O'Brien, J. (1992). Moral hazard and risk sharing: experimental evidence. Research in Experimental Economics, 5, 1-34.

Bloomfield, R. J. 1996. The interdependence of reporting discretion and informational efficiency in laboratory markets. The Accounting Review. 71(October): 493-511.

Bloomfield, R. J. 2002. The “Incomplete Revelation Hypothesis” and financial reporting. Accounting Horizons. 16 (September): 233-243.

Bloomfield, R. J., R. Libby, and M. W. Nelson. (2000). Underreactions, overreactions, and moderated confidence. Journal of Financial Markets 3: 113-117.

Bloomfield, R. J., R. Libby, and M. W. Nelson. (2003). Do investors over-rely on old elements of earnings time series? Contemporary Accounting Research20 (Spring): 1-31.

Bonner, S. (1999). Judgment and decision-making research in accounting. Accounting Horizons 13 (December): 385-398.

Bonner, S. and B. Lewis. (1990). Determinants of auditor expertise. Journal of Accounting Research, 28 (Supplement): 1-20.

Bonner, S.E., Hastie, R., Sprinkle, G.B., and Young, S.M. (2000). A review of the effects of financial incentives on performance in laboratory tasks: implications for management accounting. Journal of Management Accounting Research 12 (Fall): 19-64.

Bonner, S. E. and Sprinkle, G.B. (2002). The effects of monetary incentives on task performance: theories, evidence, and a framework for research. Accounting, Organizations and Society 27(May/July): pp. 303-345.

Calegari, M. and N. L. Fargher. (1997). Evidence that prices do not fully reflect the implications of current earnings for future earnings: An experimental markets approach. Contemporary Accounting Research 14 (Fall): 397- 434.

Camerer, C. and G. Loewenstein. (2002). Behavioral Economics: Past, Present, Future. in Advances in Behavioral Economics, C. Camerer, G. Loewenstein, and M. Rabin. (Eds.), forthcoming.

Camerer, C., G. Loewenstein, and M. Weber (1989). The curse of knowledge in economic settings: An experimental analysis. Journal of Political Economy 97 (5): 1232-1254.

Chalos, P. and S. Haka. 1990. Transfer pricing under bilateral bargaining. The Accounting Review 65 (July): 624-641.

Chow, C.W. (1983). The effects of job standard tightness and compensation scheme on performance: an exploration of linkages. The Accounting Review, 58, 667-685.

Cloyd, C. B., J. Pratt, and T. Stock. 1996. The use of financial accounting choice to support aggressive tax positions: Public and private firms. Journal of Accounting Research 34 (Spring): 23-43.

Coller, M. (1996). Information, noise, and asset prices: An experimental study. Review of AccountingStudies. 1: 35-50.

Cote, J. and D. Sanders (1996). Herding behavior: Explanations and implications. Behavioral Research in Accounting, 9: 20-45.

Cuccia, A.D., K. Hackenbrack, and M. Nelson. (1995). The ability of professional standards to mitigate aggressive reporting. The Accounting Review 70 (July): 227-249.

Cuccia, A.D. and G.A. McGill. (2000). The role of decision strategies in understanding professionals' susceptibility to judgment biases. Journal of Accounting Research. (Autumn): 419-435.

Davis, D. and C. Holt.1993. Experimental Economics. PrincetonUniversity Press.

Davis, E., Kennedy, J., and Maines, L. (2000) The relation between consensus and accuracy in low-to-moderate accuracy tasks: An auditing example. Auditing: A Journal of Practice & Theory 19 (Spring): 101-121.

Dietrich, J. R., S. J. Kachelmeier, D. N. Kleinmuntz, and T. J. Linsmeier. (2001). Market efficiency, bounded rationality, and supplemental business reporting disclosures. Journal of AccountingResearch 39 (September): 243-268.

Drake, A.R., Haka, S.F., and Ravenscroft, S.P. (1999). Cost system and incentive structure effects on innovation, efficiency, and profitability in teams. The Accounting Review, 74, 323-345.

Evans III, J.H., Hannan, R.L., Krishnan, R., & Moser, D.V. (2001). Honesty in managerial reporting. The Accounting Review 77(October): 537-559.

Fisher, J.G., Frederickson, J.R., & Peffer, S.A. (2000). Budgeting: an experimental investigation of the effects of negotiation. The Accounting Review, 75, 93-114.

Frederickson, J.R. (1992). Relative performance information: the effects of common uncertainty and contract type on agent effort. The Accounting Review, 67, 647-669.

Frederickson, J. and J. Miller. (2002). Pro forma earnings disclosures: Do analysts and nonprofessional investors react differently? Working paper, Hong Kong University of Science and Technology and University of Notre Dame.

Hastie, R. (2001). Problems for judgment and decision making. Annual Review of Psychology. 52: 653-683.

Hirst, D.E., P. Hopkins, and J. Wahlen. (2002). Fair value accounting and natural hedging in commercial banks, Working paper, Indiana University and University of Texas.

Hirst, D. E., K. E. Jackson, and L. Koonce. (2003). Improving financial reports by revealing the accuracy of prior estimates. Contemporary Accounting Research 20 (Spring): 165-193.

Hite, P. A. 2002. The preparer effect on IRS customer satisfaction. Advances in Taxation. 14: 159-183.

Hite, P. A. and Hasseldine, J. 2002. Tax practitioner credentials and the incidence of IRS adjustments. Working paper. IndianaUniversity.

Hogarth, R. (1993). Accounting for decisions and decisions for accounting. Accounting, Organizations,and Society 18(5): 407-424.

Hopkins, P. (1996). The effect of financial statement classification of hybrid financial instruments on financial analysts’ stock price judgments. Journal of Accounting Research, 34 (Supplement): 33-50.

Hopkins, P. (2003). Discussion of “Do investors over-rely on old elements of the earnings time series?” Contemporary Accounting Research20 (Spring): 33-46.

Houston, R., M. F. Peters, and J. Pratt. 1999. The audit risk model, business risk, and audit planning decisions. Working paper. IndianaUniversity.

Houston, R., M. F. Peters, and J. Pratt. 2002. Residual business risk and pricing audit services. Working paper. IndianaUniversity.

Hunton, J. and R. McEwen. (1997). An assessment of the relation between analysts’ earnings forecast accuracy, motivational incentives, and cognitive information search strategy. The Accounting Review, 72 (4): 497-515.

Kachelmeier, S. J. and R. R. King. (2002). Using laboratory experiments to evaluate accounting policy issues. Accounting Horizons 16 (September): 219-232.

Kachelmeier, S. J. and K. L. Towry. (2002). Negotiated transfer pricing: Is fairness easier said than done? The Accounting Review 77 (July): 571-593.

Kennedy, J. (1993). Debiasing audit judgment with accountability: A framework and experimental results. Journal of Accounting Research 31 (Autumn): 231-245.

Kennedy, J. (1995). Debiasing the curse of knowledge in audit judgment. The Accounting Review, 70 (2): 249-273.

Kennedy, J., T. Mitchell, and S.E. Sefcik. (1998). Disclosure of contingent environmental liabilities: some unintended consequences? Journal of Accounting Research 36 (Autumn): 257-277.

Keppel, G. (1991). Design and Analysis: A Researcher’s Handbook. Upper Saddle River, NJ: Prentice-Hall, Inc.

King, R. R. (1996). Reputation formation for reliable reporting: An experimental investigation. The Accounting Review 3 (July): 375-396.

King, R. R. (2002). An experimental investigation of self-serving biases in an auditing trust game: The effect of group affiliation. The Accounting Review 77 (April): 265-284.

King, R. R. and D. E. Wallin. (1995). Experimental tests of disclosure with an opponent. Journal ofAccounting and Economics 19 (February): 139-167.

Koonce, L, M.G. Lipe, and M.L. McAnally. (2002). The effect of disclosure choices on investors’ risk assessments of financial instruments. Working paper, University of Texas and University of Oklahoma.