Advertisement

Review of Accounting Studies

, Volume 11, Issue 2–3, pp 417–427 | Cite as

Discussion of “Feedback loops, fair value accounting and correlated investments”

  • Lisa Koonce
Article

Abstract

My paper discusses Bloomfield, Nelson, and Smith’s (BNS) model and experimental study of the price dynamics that arise when a firm’s accounting reports are predictable from its stock returns. This phenomenon occurs when the firm takes a position in an asset that generates unrealized gains and losses (UGL’s) that are correlated with the firm’s own returns. My discussion of BNS focuses on three features that are often used to evaluate research—namely, potential for falsification, internal validity, and external validity. I view and evaluate the BNS paper in light of each of these features. I also briefly comment on how well the paper addresses issues related to fair value accounting.

Keywords

Accounting Market behavior Psychology Bias 

JEL Classification

M41 G14 C92 

Notes

Acknowledgements

I thank Eric Hirst, Bill Mayew, Curt Rogers, Mary Stone, Connie Weaver, and Jen Winchel for their helpful comments on this discussion.

References

  1. Arkes, H. (1991). Costs and benefits of judgment errors: Implications for debiasing. Psychological Bulletin, 110, 486–498.CrossRefGoogle Scholar
  2. Bonner, S. (1999). Judgment and decision-making research in accounting. Accounting Horizons, 13, 385–398.Google Scholar
  3. Camerer, C. (1987). Do biases in probability judgments matter in markets? Experimental evidence. The American Economic Review, 77, 981–997.Google Scholar
  4. Camerer, C., & Hogarth, R. (1999). The effects of financial incentives in experiments: A review and capital-labor-production framework. Journal of Risk and Uncertainty, 19, 7–42.CrossRefGoogle Scholar
  5. Crimmel, B., & Schildkraut, J. (2001). Stock option plans surveyed by NCS. Compensation and Working Conditions, 6, 3–21.Google Scholar
  6. Daniel, K., Hirshleifer, D., & Teoh, S. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49, 139–210.CrossRefGoogle Scholar
  7. Deloitte. (2005). Options take a hit, but what will take their place? The 2005 Deloitte stock compensation survey. New York, NY: Deloitte Development LLC.Google Scholar
  8. Employee Retirement Income Security Act of 1974. (1974) 29 U.S.C. § 1001, et seq. (referred to herein as ERISA).Google Scholar
  9. Frederickson, J., & Miller, J. (2004). The effects of pro forma earnings disclosures on analysts’ and nonprofessional investors’ equity valuation judgments. The Accounting Review, 79, 667–686.Google Scholar
  10. Hirst, E., & Hopkins, P. (1998). Comprehensive income reporting and analysts’ valuation judgments. Journal of Accounting Research, 36, 47–75.CrossRefGoogle Scholar
  11. Johnson, E., & Payne, J. (1985). Effort and accuracy in choice. Management Science, 31, 395–414.CrossRefGoogle Scholar
  12. Kachelmeier, S., & King, R. (2002). Using laboratory experiments to evaluate accounting policy issues. Accounting Horizons, 16, 219–232.Google Scholar
  13. Kadous, K., Koonce, L., & Towry, K. (2005). Quantification and persuasion in managerial judgment. Contemporary Accounting Research, 22, 643–686.CrossRefGoogle Scholar
  14. Koonce, L., & Mercer, M. (2005). Using psychology theories in archival financial accounting research. Journal of Accounting Literature, 24, 175–212.Google Scholar
  15. Koonce, L., Lipe, M., & McAnally, M. (2005). Judging the risk of financial instruments: Problems and potential remedies. The Accounting Review, 80, 871–895.Google Scholar
  16. Kothari, S. P. (2001). Capital markets research in accounting. Journal of Accounting and Economics, 31, 105–231.CrossRefGoogle Scholar
  17. Libby, R., & Luft, J. (1993). Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment. Accounting, Organizations and Society, 18, 425–450.CrossRefGoogle Scholar
  18. Libby, R., Bloomfield, R., & Nelson, M. (2002). Experimental research in financial accounting. Accounting, Organizations and Society, 27, 775–810.CrossRefGoogle Scholar
  19. Maines, L., & McDaniel, L. (2000). Effects of comprehensive-income characteristics on nonprofessional investors’ judgments: The role of financial-statement presentation format. The Accounting Review, 75, 179–207.Google Scholar
  20. Popper, K. (1963). Conjectures and refutations (pp. 33–39). Routledge: London. Reproduced in Theodore Schick (Ed.) (2000). Readings in the philosophy of science (pp. 9–13). Mountain View, CA: Mayfield Publishing Company.Google Scholar
  21. Schleifer, A. (2000). Inefficient markets: An introduction to behavioral finance. Oxford: Oxford University Press.Google Scholar
  22. Smith, P., & Reither, C. (1996). Comprehensive income and the effect of reporting it. Financial Analysts Journal, 52, 14–19.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2006

Authors and Affiliations

  1. 1.Department of Accounting, McCombs School of BusinessThe University of TexasAustinUSA

Personalised recommendations