An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Joshua Herbold
University of Montana- - Missoula

Abstract: This paper experimentally examines two research questions related to decision makers’ interpretations of ex post disclosures about prior-period accounting estimate accuracy: Are decision makers’ interpretations of such reports affected by the properties of the time series observed, and are decision makers’ interpretations of such reports susceptible to biases resulting from directionally motivated reasoning? I hypothesize and find that directionally motivated reasoning moderates decision makers’ misconceptions of the properties of noise and bias, such that potential stockholders are more likely than other decision makers to attribute misestimations to bias, while current stockholders are more likely than other decision makers to attribute misestimations to noise, and that these differences decrease as reasonableness constraints increase. Results from a second experiment show that increasing the number of observations does not mitigate the effects observed in the first experiment.

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