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ABO Doctoral Consortium

ABO Doctoral Consortium. Choosing Participants for Financial Accounting Experiments October 10, 2008 http:// kelley.iu.edu/facultyglobal/FacultyProfile.cfm?ID=8331. Objectives. Identify participants in financial accounting experiments Identify characteristics of participants

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ABO Doctoral Consortium

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  1. ABO Doctoral Consortium Choosing Participants for Financial Accounting Experiments October 10, 2008 http://kelley.iu.edu/facultyglobal/FacultyProfile.cfm?ID=8331

  2. Objectives • Identify participants in financial accounting experiments • Identify characteristics of participants • Discuss factors to consider when choosing participants • Provide advice for finding participants

  3. Financial Reporting Process

  4. Research Process

  5. Variables Influencing Judgments and Decisions • Decision-Maker Characteristics • Task Characteristics • Environmental Characteristics (Sarah Bonner, Judgment and Decision Making in Accounting, Prentice-Hall, 2007)

  6. Participant (Decision-Maker) Characteristics • External / Easily observable or measured • Gender, Age, Professional Certifications, Work Experience • Internal / Need to be measured via test or possibly manipulated • Abilities • Knowledge • Preferences

  7. Participant Characteristics - Abilities • Abilities • Verbal abilities – reading comprehension • Reasoning abilities - interpret data, reason from analogy, reason analytically • Spatial abilities – identify and comprehend patterns • Measurement • Typically through standardized college admission tests – SAT and GMAT • Manipulation • Difficult in adults

  8. Participant Characteristics - Knowledge • Knowledge • Semantic • General world knowledge, domain-specific knowledge, sub-specialty knowledge • Episodic knowledge/beliefs based on personal experience • Incentives, reactions of other parties, empirical regularities • Measurement • Knowledge-specific tests (e.g., CPA exam questions) • Post-experimental questions about beliefs • Manipulation • Possible, but need to be careful

  9. Participant Characteristics - Preferences • Preferences (Utility) • Money (Risk Aversion) • Effort • Honesty, ethical behavior, welfare of others • Measurement • Validated tests from economics, psychology, sociology • Manipulation • Induced preferences for money (Berg et al. QJE 1986)

  10. Role of Participant Characteristics • Independent Variable • Decision-maker characteristic directly affects dependent variable • McDaniel et al. (TAR 2002) • Moderating Variable • Decision-maker characteristic changes the relation between a task or environmental variable and the dependent variable • Elliott (TAR 2006) • Neither of above – just choosing participants for your task • Think in terms of a moderating role

  11. X Participant Characteristics as Independent Variable (McDaniel et al.) Causal relation Y Experience (Accounting) (Business) Judgment (Reporting Issue Identified – recurring vs. nonrecurring)

  12. Participant Characteristics as Independent Variable • Not typical in financial accounting research • Typically requires measuring participant characteristics – external/internal • May be hard to avoid confounding • External characteristics (e.g., years of experience) typically represent a number of internal characteristics (e.g., knowledge, ability) • For example, knowledge and ability are rarely independent (Link 2 in Libby and Luft AOS 1993) • A problem if you want to establish causality for internal characteristics (need manipulation + random assignment, not measurement)

  13. Participant Characteristics as Moderating Variables (Elliott 2006) U Knowledge Y X GAAP – ProForma Reconciliation (Yes/No) Decision (Investment Decision)

  14. Participant Characteristics as Moderating Variables • Use this approach even if you aren’t planning on a moderating variable approach • Does theory suggest that judgments and decisions will depend on characteristics (abilities, knowledge, preferences) of participants? Will the JDM process or outcomes change? • Does the level of relevant characteristics vary among relevant decision-makers or participant groups?

  15. Participant Characteristics as Moderating Variables • If answers to prior questions are yes, how do I proceed? • Embed theory in paper and test multiple groups that should differ based on theory – true moderating study • Examine only one group • What group is most important in terms of the research question? • External validity limitations

  16. Participant Characteristics – Professionals versus Students • Some generalizations • Basic reasoning abilities typically don’t change much after adulthood • College students likely have similar abilities to most adults • Be careful – there can be cross-sectional variation - top people in any field have survived tournaments and are likely to have higher ability

  17. Participant Characteristics – Professionals versus Students • Some generalizations • Knowledge is a big factor in accounting experiments • Semantic knowledge – world knowledge and sub-specialty knowledge increases with experience • Episodic Knowledge / Beliefs also change with experience – personal experiences with incentives, behavior of other people

  18. Participant Characteristics – Professionals versus Students • Some generalizations • Preferences • Reaction to economic incentives is basic human reaction • Experimental research based on economic theory typically can use abstract tasks and college students

  19. Issues – Working with Professional Participants • Negative externalities of using professionals when not needed: limited resource (Libby, Bloomfield & Nelson AOS 2002) • Places high demands on researcher – good research question requiring professionals, good design, good instrument • Personal experiences of professionals lead to expectations that will create problems if not met • Need to run materials by professionals and pilot test

  20. Issues – Working with Professional Participants • Selection and non-response bias may be stronger with professionals than with students (Peecher and Solomon 2001) • End up using one firm – how general are your results? • Professionals are busy people which leads to non-response • Need to get them interested and committed • Work around their schedule

  21. Source of Participants • Preparers • Alumni directory – controllers, CFO’s • Financial Executive Institute • Institute of Management Accountants

  22. Source of Participants • Investors - Nonprofessional • College Students • Think carefully about research question and task • Insights on using MBA students as proxies for investors – Elliott et al. (TAR 2007) • National Association of Investors Corporation – 400,000 members • See Hodge (AH 2003)

  23. Source of Participants • Financial Analysts (sell and buy side) • Alumni Directory • Individual investment banks, financial management firms, pensions funds, etc. • Association for Investment Management and Research • Nelson’s Directory of Investment Managers

  24. Source of Participants • Standard setters and regulators • Good luck!

  25. Conclusions • Appropriate choice of participants requires a good research question, a good design and task, and careful consideration of how personal characteristics affect JDM • How does theory suggest different levels of a characteristic would change JDM?

  26. Conclusions • Be enthusiastic and able to explain why people should care about your research • Practice describing your research to your accountant and non-accountant friends • BE PERSISTENT !!! (but not annoying!)

  27. References • Berg, J.E., Daley, L.A., Dickhaut, J.W., and J. O’Brien. 1986. Controlling preferences for lotteries on units of experimental exchange. Quarterly Journal of Economics 101 (May): 281-306. • Elliott, W. B. 2006. Are investors influenced by pro forma emphasis and reconciliations in earnings announcements? The Accounting Review 81 (January): 113-133. • Elliott, W. B., F. Hodge, J. Kennedy, and M. Pronk. 2007. Are MBA students a good proxy for nonprofessional investors? The Accounting Review (January):139-168. • Hodge, F. D. 2003. Investors’ perceptions of earnings quality, auditor independence, and the usefulness of audited financial statements. Accounting Horizons 17(Supplement): 37-48. • Libby, R., Bloomfield, R., and M. Nelson. 2002. Experimental research in financial accounting. Accounting, Organizations and Society 27 (November): 775-810. • Libby, R. and J. Luft. 1993. Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment. Accounting Organizations and Society 18 (July):425-450. • McDaniel, L.S., Martin, R. D., and Maines, L.A. (2002). Evaluating financial reporting quality: The effects of financial expertise vs. financial literacy. The Accounting Review 77 (Supplement): 139-167. • Peecher, M. and I. Solomon. (2001). Theory and experimentation in studies of audit judgments and decisions: Avoiding common research traps. International Journal of Auditing (November): 193-203.

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