We examine how shareholders' trust in managers is affected by the outcome of earnings management (inconsistent vs. consistent with shareholders' interests) and the method of earnings management (accruals vs. real methods). Using a controlled experiment, we predict and find that trust is impaired...

In this study we examine how an audit qualification of an accounting change affects investor assessments of the firm's current and future financial performance, and the representational faithfulness of the change. We investigate this issue for income-increasing and income-decreasing accounting...

In this study we report the results of a laboratory experiment in which we examine whether the credibility of management's balance-sheet classification of hybrid securities as liabilities or equity is a joint function of (1) the level of classification discretion in the reporting environment,...

Researchers, practitioners, and standard setters emphasize the importance of disaggregating financial statements into operating and financial activities. However, there is a lack of research demonstrating that this disaggregation improves forecasts of profitability. In this study, we consider...

Research suggests that investors fail to fully process changes in return on assets due to their incomplete processing of changes in asset turnover. We propose that investors do not fully process changes in return on assets—stemming from changes in asset turnover—because of their (1) fixation...

A fundamental accounting question is whether investors perceive low risk when earnings are smooth relative to the volatility of operating cash flows. We conduct two experiments to examine this question. Absent additional information concerning the likelihood of earnings management, our first...