The Effects of Expected and Actual Accounting Choices on Judgments and Decisions

Abstract

ABSTRACT: This research investigates how financial statement users' judgments and decisions are affected by the extent to which a firm's actual accounting choices match users' expectations. Based on prior communications research, I predict and find that users' credibility judgments are more extreme when a firm's actual accounting choices do not match expectations. Experiment 1 supports this prediction in a stock-based compensation context, and Experiment 2 supports it in an accounting estimate context. Further, evidence from Experiment 1 supports the prediction that credibility judgments mediate the effect of a mismatch on investment decisions. Finally, evidence from Experiment 2 partially supports the prediction that users who encounter a mismatch between actual and expected accounting choices are more likely to search for additional information than are users who encounter a match. The results have implications for accounting researchers, regulators, and managers interested in understanding how firms' accounting choices affect users' decisions.

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