The Ability to Moderate Recency Effects through Framing of Management Accounting Information

Abstract

Management accounting is concerned with information that is obtained and provided to managers for use in the planning and controlling activities within an organization (Granof et al., 1993). Typically, in management accounting, information is accumulated in a sequential manner (Lewis et al., 1983; Brown, 1985; Dillard et al., 1991). That is, information is continuously acquired and used as a basis for revising existing beliefs. For example, a management accountant may prepare a budget for a future period based on the prior period's budget and adjusted for expected changes in activities. Subsequently, various unexpected activities may occur (e.g., labor strikes, machine breakdowns, changes in suppliers' prices). Management accountants provide information about the unexpected activities to managers, and they respond by updating their beliefs concerning the likelihood of achieving the budget. Research has found that normative models (e.g., Bayes' Theorem (Savage, 1962)) do not adequately describe the belief-updating process. The order in which information is provided to managers should not affect, normatively, their overall judgments (Einhorn and Hogarth, 1985). That is, when different managers are given the same pieces of evidence about an activity within an organization, they should arrive at the same judgments or beliefs (ceteris paribus). Otherwise, the organization's efficiency and effectiveness may be adversely affected through lack of consensus within management, improper actions taken by managers, etc. Recent behavioral accounting studies find that information order can affect the belief revision process. More precisely, when mixed information (positive and negative) is received sequentially, the more recently received information is given more weight (Ashton and Ashton, 1988; Tubbs et al., 1990; Asare, 1992; Messier, 1992; Gelardi, 1992; Pei et al., 1992; Reckers and Schultz, 1993). This phenomenon is termed the recency effect. Prior research suggests that recency effects are robust across experimental settings. However, little research has been conducted to investigate whether such effects may be mitigated or moderated by other factors (c.f. Messier and Tubbs (1994) for an exception). When different judgements are made due solely to the order of information received by managers, efforts should be made to moderate such undesirable order effects. Potential moderating factors within the control of management accountants need to be examined when order effects occur due to the managerial accounting function. This study examines the potential moderating effects of framing of decision-relevant information. Many prior studies using managerial-accounting contexts have examined the effects of this variable (e.g., Payne et al., 1980; Hershey and Schoemaker, 1980; Mowen and Mowen, 1986; Budescu and Weiss, 1987; Mowen, 1987; Rutledge and Harrell, 1993, 1994). The next section discusses why framing of information is likely to have an impact on the severity of recency effects. The remainder of this paper is organized as follows. First, a framework is provided to (1) explain the occurrence of recency effects, and (2) discuss the potential moderating effect of framing of information. Using this framework as a basis, testable research hypotheses are developed. Next, the research methods are described and the experimental results are reported. Lastly, concluding remarks are provided. I. THEORETICAL ISSUES AND HYPOTHESES Hogarth and Einhorn's (1992) belief-adjustment model is a descriptive model of human behavior that explains the occurrence of information-order effects. This model is reviewed, focusing on the aspects that lead to the expectation of recency effects. The purpose of this review is to provide an understanding as to why such effects occur. Next, framing (the experimental variable of interest) is discussed, including its potential moderating effects. The Belief-Adjustment Model and Recency Effects Hogarth and Einhorn's belief-adjustment model assumes that people handle belief-updating tasks by a general, sequential anchoring-and-adjustment process in which a current anchor (belief), is adjusted by the impact of succeeding pieces of information. …

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