Experimentalresearchinﬁnancialaccounting RobertLibby*,RobertBloomﬁeld,MarkW.Nelson Johnson Graduate School of Management, 383 Sage Hall, Cornell University, Ithaca NY 14853 6201, USA Abstract This paper uses recent experimental studies of ﬁnancial accounting to illustrate our view of how such experiments canbeconductedsuccessfully.Ratherthanprovideanexhaustivereviewoftheliterature,wefocusonhowparticular examples illustrate successful use of experiments to determine how, when and (ultimately) why important features of ﬁnancial accounting settings inﬂuence behavior. We ﬁrst describe how changes in views of market eﬃciency, reliance on the experimentalist’s comparative advantage, new theories, and a focus on keyinstitutional features have allowed researchers to overcome the criticisms of earlier ﬁnancial accounting experiments. We then describe how speciﬁc streams of experimental ﬁnancial accounting research have addressed questions about ﬁnancial communication between managers, auditors, information intermediaries, and investors, and indicate how
future research can extend thosestreams.Wefocusparticularlyon(1)howmanagersandauditorsreportinformation;(2)howusersofﬁnancial information interpret those reports; (3) how individual decisions aﬀect market behavior; and (4) how strategic inter- actions between information reporters and users can aﬀect market outcomes. Our examples include and integrate experiments that fall into both the ‘‘behavioral’’ and‘‘experimental economics’’ literatures in accounting. Finally, we discuss how experiments can be designed to be both eﬀective and eﬃcient. # 2002 Elsevier Science Ltd. All rights reserved. 1. Introduction Financial accounting research is a broad ﬁeld that examines ﬁnancial communication between managers, auditors, information intermediaries, and investors, as well as the eﬀects of regulatory regimes on that process. Much of this literature focusesonmanagers’andauditors’reportingdeci- sions and their relationships to analysts’ forecasts and value estimates, investors’ trading decisions, and resulting market prices. This clear focus on judgment and decision making led to the large number of experimental ﬁnancial accounting studies published in major accounting journals in the1960sand1970s. Serious criticisms of this early research (e.g. Gonedes&Dopuch,1974)turnedexperimentalists’ focusawayfromﬁnancialaccountingissuesinthe 1980s and early 1990s. As discussed by Maines (1995) and Berg, Dickhaut, and McCabe (1995), major elements of these criticisms were: (1) the irrelevance of individual behavior in market set- tings, in which competitive forces will eliminate individual‘‘errors’’;(2)poormatchingofresearch methods to research questions; (3) the lack of psychologicaloreconomictheorytopredicteﬀects and specify the mechanisms through which they occur; and (4) failure to capture relevant aspects 0361-3682/02/$-see frontmatter#2002ElsevierScienceLtd. All rightsreserved. PII: S0361-3682(01)00011-3 Accounting, OrganizationsandSociety27(2002)775–810 www.elsevier.com/locate/aos * Corresponding author. Tel.: +1-607-255-3348; fax: +1- 607-254-4590. E-mail address:email@example.com(R.Libby). of the decisions of interest, in particular, decision makerattributesandinstitutionalfeatures. Beginning in the mid-1990s, there was a resur- genceofexperimentalresearchaddressinganeven broader spectrum of ﬁnancial accounting issues. This paper presents our view of how this new lit- erature has addressed prior criticisms, and how it cancontinuetoshedlightonﬁnancialaccounting questions. We argue that signiﬁcant evidence of capital market ineﬃciency has renewed interest in how individuals make key accounting-related decisions and how these decisions aﬀect market prices. Recent studies take advantage of the experimentalist’s comparative advantage at disen- tangling variables that are confounded in natural settings and measuring intervening processes to drawstrongcausalinferences.Theoriescombining psychology and economics have allowed experi- mentaliststospecifymore clearly the mechanisms aﬀecting individual and market behavior. Finally, most of the new studies focus on issues of clear relevance to ﬁnancial accounting, particularly the eﬀects of decision-maker knowledge and motiva- tion, the complex information environment, reg- ulation,andstrategicinteraction. Thispaperisaimedprimarilyatthosewhoplan to conduct ﬁnancial accounting experiments, and secondarilyatotherﬁnancialaccountantswhoare interested in what can be learned from experi- mental studies. Our primary goal is...
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