Can Backward-looking and Forward-looking Information Debias Prospect Effect in Earnings Announcement?

Jogianto Hartono; Sri Wahyuni

doi:10.22146/gamaijb.26282

Can Backward-looking and Forward-looking Information Debias Prospect Effect in Earnings Announcement?

Jogianto Hartono, Sri Wahyuni

(Submitted 5 July 2017)

(Published 22 December 2017)

Abstract

This study examines the important issue of whether additional pieces of information about the earnings’ characteristics (their quantitative description and predicted earnings) can debias the prospect effect of the earnings’ announcement. The prospect effect bias can be mitigated by the availability of clear information and an integrated disclosure. Additional information that is included with the previous information will make the investors’ beliefs stronger and it will debias any psychological effects.This research confirms the prospect effect’s bias that investors react more negatively when evaluating a company’s performance after a negative earnings information disclosure rather than react positively in evaluating the performance for a positive earnings information disclosure. The results also show that when additional pieces of information, such as a quantitative description and predicted earnings are added, they can mitigate the prospect effect’s bias. Additional information of predicted earnings as forward-looking oriented information has a stronger debiasing effect than that of additional information of a quantitative description as backward-looking oriented information.

Keywords

backward-looking oriented information; debias; forward-looking oriented information; mitigating bias; predicted earnings; prospect theory; quantitative description

Full Text: PDF

DOI: 10.22146/gamaijb.26282

References

Ajinkya, B., and M. Gift. 1984. Corporate Managers, earnings forecasts and symmetrical adjustment of market expectations. Journal of Accounting Research 22 (2): 425-444.

Baginski, J., M. Hassell, and M. D. Kimbrough. 2004. Why do managers explain their earnings forecasts? Journal of Accounting Research 42 (1 March): 1-29.

Barberis, N. C. 2013. Thirty years of prospect theory in economics: A review and assessment. Journal of Economic Perspectives 27: 173-196.

Bazerman. 1994. Judgment in Managerial Decision Making. Willey & Sons. Inc.

Bernard, V. L. 1989. Capital markets research in accounting during the 1980’s: Critical review. The State of Accounting Research: 72-120.

Boldt, M. N. 2001. The effects of functional fixation on relative performance evaluations. Academy of Strategic and Organizational Leadership Journal 5 (1): 17-30.

Boles, T. L., and D. M. Messick. 1995. A reverse outcome bias: The influence of multiple reference points on the evaluation of outcomes and decisions. Organizational Behavior and Human Decision Processes 61 (3): 262-275.

Cooper, D. R., and P. S. Schindler. 2006. Business Research Methods. Singapore, McGraw-Hill/Irwin.

Easton, P., and M. Zmijewski. 1989. Cross-sectional variation in the stock market response to accounting earnings announcements. Journal of Accounting and Economics. 11: 117-141.

Feltham, G. A., and J. A. Ohlson. 1995. Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research 11 (2): 689-731.

Fiegenbaum, A., and Thomas, H. 1988. Attitudes towards risk and the risk-return paradox: Prospect theory explanations. Academy of Management Journal 31: 85-106.

Fiegenbaum, A., and Thomas, H. 1990. Prospect theory and the risk-return association: An empirical examination of 85 industries. Journal of Economic Behavior and Organization 14:187-203.

Foster, G. 1977. Quarterly accounting data: Time-series properties and predictive-ability results. The Accounting Review. 52: 1-21.
Freeka, T. J., and C. F. Lee. 1983. Generalized financial ratio adjustment processes and their implication. Journal of Accounting Research 21: 308-316.

Freeman, R. and S. Tse. 1992. A nonlinear model of security price responses to unexpected earnings. Journal of Accounting Research. 30: 185-209.

Han. J., and J. Wild. 1987. Incremental information in the components of managements’ forecasts. Working Paper (March). Michigan State University.

Han. J., and H. Tan. 2007. Investors’ Reactions to Management Guidance Forms: The Influence of Multiple Benchmarks. The Accounting Review 82 (2): 521-543.

Harsha, P. D., and M. C. Knapp. 1990. The use of within-and between-subjects experimental designs in behavioral accounting research: A methodological note. Behavioral Research in Accounting 2: 50-62.

Hartono, J. 2004. How, Why and When Investors Revise Their Beliefs to Company Information and Their Implications to Firms Announcement Policy. ANDI Yogyakarta.

Hartono, J., and S. Wahyuni. 2014. Implementation of multiple reference points theory in management guidance information disclosure. Working Paper. Universitas Gadjah Mada.

Hirst, D. E., K. E. Jackson, and L. Koonce. 2003. Improving financial reports by revealing the accuracy of prior estimates. Contemporary Accounting Research 20 (1): 165-193.

Jegers, M. 1991. Prospect theory and the risk-return relation: Some Belgian evidence. Academy of Management Journal 34: 215-225.

Kahneman, D., and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47 (2 March): 263-291.

King, R., G. Pownall, and G. Waymire. 1990. Expectations adjustments via timely management forecasts: Review, synthesis, and suggestions for future research. Journal of Accounting Literature 9: 113-144.

Klinger, D., and Tsur, I. 2011. Prospect theory and risk-seeking behavior by troubled firms. The Journal of Behavioral Finance, 12: 29-40.

Kormendi, R. and R. Lipe. 1987. Earnings innovations, earnings persistence, and stock return. Journal of Business. 60: 323-345.

Krische, S. D. 2005. Investors’evaluations of strategic prior-period benchmark disclosure in earnings announcements. The Accounting review 80 (1): 243-268.

Lakonishok, J., and S. Seymour. 1989. Past price changes and current trading volume. Journal of Portfolio Management, 15: 18-24.

Lee, C. M. C. 1999. Accountings-based valuation: Impact on business practices and research. Accounting Horizons 13 (4): 413-425.

Lehner, J. M. 2000. Shifts of reference points for framing of strategic decisions and changing risk-return associations. Management Science 46: 63-76.

Lev, B. 1969. Industry averages as targets for financial ratios. Journal of Accounting Research 7: 290-299.

Libby, R., R. J. Bloomfield, and M. W. Nelson. 2002. Experimental research in financial accounting. Accounting, Organizations and Society 27 (8): 775-810.

Libby, R., H. T. Tan, and J. E. Hunton. 2006. Does the form of managements’ earnings guidance affect analysts’ earnings forecasts? The Accounting Review 81 (1): 251-270.

Maines, L. A., and L. S. McDaniel. 2000. Effect of comprehensive-income characteristics on nonprofessional investors’judgments: The role of financial-statement presentation format. The Accounting Review 75 (2): 179-207.

Odean, T. 1998. Are investors reluctant to realize their loss? Journal of Finance 53: 1775-1798.

Ohlson, J. A. 1995. Earnings, book values, and dividends in security valuation. Contemporary Accounting Research 11 (2): 661-687.

Palepu, K., P. Healy, and V. Bernard. 2000. Business Analysis and Valuation. Secon Edition, Mason, OH: South-Western College Publishing.

Pattel, J. 1976. Corporate forecasts of earnings per share and stock price behavior: Empirical tests. Journal of Accounting Research (Autumn): 246-276.

Penman, S. 1980. An empirical investigation of the voluntary disclosure of corporate earnings forecasts. Journal of Accounting Research (Spring): 132-160.

Pownall, G., and G. Waymire. 1989. Voluntary Disclosure Credibility and Securities Prices: Evidence from management earnings forecasts, 1969-73. Journal of Accounting Research 27 (2 Autumn): 227-245.

Pownall, G., C. Wasley, and G. Waymire. 1993. The stock price effects of alternative types of management earnings forecasts. The Accounting Review 68 (October): 896-912.

Schrand, C. M., and B. R. Walther. 2000. Strategic Benchmarks in Earnings Announcements: The Selective Disclosure of Prior-Period Earnings Components.The Accounting Review 75 (2): 151-177.

Sinha, T. 1994. Prospect theory and risk return association: Another look. Journal of Economic Behavior and Organization 24: 225-231.

Stracca, L. 2002. Behavioral finance and aggregate market behavior: Where do we stand? Working Paper. European Central Bank.

Trueman, B. 1986. Why do managers voluntarily release earnings forecast? Journal of Accounting and Economics (January): 53-72.

Wahyuni, S., and J. Hartono. 2010. Strategic disclosure of multiple benchmarks in earnings announcements: An examination of investor behavior based on internal and external factors in the performance evaluation. The Indonesian Journal of Accounting Research 13(Mei): 149-166.

Wahyuni, S., and J. Hartono. 2012. Reminder effect and anchoring-adjustment in earnings announcement. Implementation of prior-period benchmark disclosure strategy. Journal of Indonesian Economy & Business 27 (September): 390-405.

Waymire, G. 1984. Additional evidence on the information content of management earnings forecast. Journal of Accounting Research (Autumn): 703-718.

Refbacks

There are currently no refbacks.

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.