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Article
Publication date: 5 August 2019

Guojin Gong, Yue Li and Ling Zhou

It has been widely documented that investors and analysts underreact to information in past earnings changes, a fundamental performance indicator. The purpose of this…

Abstract

Purpose

It has been widely documented that investors and analysts underreact to information in past earnings changes, a fundamental performance indicator. The purpose of this paper is to examine whether managers’ voluntary disclosure efficiently incorporates information in past earnings changes, whether analysts recognize and fully anticipate the potential inefficiency in management forecasts and whether managers’ potential forecasting inefficiency entirely results from intentional disclosure strategies or at least partly reflects managers’ unintentional information processing biases.

Design/methodology/approach

Archival data were used to empirically test the relation between management earnings forecast errors and past earnings changes.

Findings

Results show that managers underreact to past earnings changes when projecting future earnings and analysts recognize, but fail to fully anticipate, the predictable bias associated with past earnings changes in management forecasts. Moreover, analysts appear to underreact more to past earnings changes when management forecasts exhibit greater underestimation of earnings change persistence. Further analyses suggest that the underestimation of earnings change persistence is at least partly attributable to managers’ unintentional information processing bias.

Originality/value

This study contributes to the voluntary disclosure literature by demonstrating the limitation in the informational value of management forecasts. The findings indicate that the effectiveness of voluntary disclosure in mitigating market mispricing is inherently limited by the inefficiency in management forecasts. This study can help market participants to better use management forecasts to form more accurate earnings expectations. Moreover, our evidence suggests a managerial information processing bias with respect to past earnings changes, which may affect managers' operational, investment or financing decisions.

Details

International Journal of Accounting & Information Management, vol. 27 no. 3
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 26 November 2020

Niklas Kreilkamp, Maximilian Schmidt and Arnt Wöhrmann

The purpose of this paper is to investigate if and how firms approach debiasing and what determines its success. In particular, this study examines if debiasing is…

Abstract

Purpose

The purpose of this paper is to investigate if and how firms approach debiasing and what determines its success. In particular, this study examines if debiasing is effective in reducing cognitive decision biases. This paper also investigates organizational characteristics that determine the effectiveness of debiasing.

Design/methodology/approach

This study uses survey data from German firms to answer the research questions. Target respondents are individuals in a senior management accounting function.

Findings

In line with the hypotheses, this paper finds that debiasing can reduce cognitive biases. Moreover, this study finds that psychological safety not only directly influences the occurrence of cognitive biases but is also an important factor that determines the effectiveness of debiasing.

Research limitations/implications

This paper provides evidence that debiasing can serve as a powerful management accounting tool and discusses debiasing in the context of recent management accounting literature. This study also adds to the stream of research that investigates the role of psychological safety in organizations by highlighting its importance for successful debiasing.

Practical implications

This paper informs firms that use or intend to use debiasing about crucial determinants to consider when debating its implementation, i.e. psychological safety. This study also identifies risk management as a potential interface for the implementation of systematic debiasing.

Originality/value

While previous research primarily addresses specific cognitive biases and debiasing mechanisms using lab experiments, this is – to the best of the knowledge – the first study investigating cognitive biases and debiasing on a broad conceptual level using survey data.

Details

Journal of Accounting & Organizational Change, vol. 17 no. 4
Type: Research Article
ISSN: 1832-5912

Keywords

Article
Publication date: 9 December 2020

Chee Kwong Lau

This study examines (1) the extent of key audit matters (KAMs) reported by auditors is related to accounting estimates, (2) whether measurement uncertainty and management

Abstract

Purpose

This study examines (1) the extent of key audit matters (KAMs) reported by auditors is related to accounting estimates, (2) whether measurement uncertainty and management bias affect auditors to do so and (3) whether the use of accounting estimates, given the measurement uncertainty and management bias reported in KAMs adversely affects the decision usefulness of accounting information.

Design/methodology/approach

Data on key audit matters, accounting estimates, measurement uncertainty, management bias, etc. were collected from the auditor's reports of 351 sample Chinese listed firms. It employs regression analyses to assess the hypotheses on issues affecting the report of these key audit matters and the impacts on the decision usefulness of accounting information.

Findings

Fair value and impairment loss estimations make up of 2.6 and 44.1% of the 606 KAMs identified, respectively. Measurement uncertainty is positively, while management bias is negatively, affecting auditors report KAMs related to accounting estimates. The use of accounting estimates in firms where their auditors reported the KAMs related to accounting estimates does not enhance the value and predictive relevance of reported earnings. The assurance works on, and reporting of, KAMs served as a “red flag” about the accounting estimates.

Practical implications

The use of accounting estimates does not always lead to enhanced decision-useful accounting information. Auditors, in their stewardship role, shall ensure that the measurement uncertainty issue is appropriately identified, addressed and verified. In addition, they shall provide an effective check-and-balance to the accounting discretion managers have in providing decision-useful information from opportunistic reporting.

Originality/value

This study examines the proposition that while the use of estimates can enhance the decision usefulness of accounting information, it can also induce measurement uncertainty and management bias into financial reporting.

Details

Asian Review of Accounting, vol. 29 no. 1
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 11 January 2018

Thai Young Kim, Rommert Dekker and Christiaan Heij

The purpose of this paper is to show that intentional demand forecast bias can improve warehouse capacity planning and labour efficiency. It presents an empirical…

2175

Abstract

Purpose

The purpose of this paper is to show that intentional demand forecast bias can improve warehouse capacity planning and labour efficiency. It presents an empirical methodology to detect and implement forecast bias.

Design/methodology/approach

A forecast model integrates historical demand information and expert forecasts to support active bias management. A non-linear relationship between labour productivity and forecast bias is employed to optimise efficiency. The business analytic methods are illustrated by a case study in a consumer electronics warehouse, supplemented by a survey among 30 warehouses.

Findings

Results indicate that warehouse management systematically over-forecasts order sizes. The case study shows that optimal bias for picking and loading is 30-70 per cent with efficiency gains of 5-10 per cent, whereas the labour-intensive packing stage does not benefit from bias. The survey results confirm productivity effects of forecast bias.

Research limitations/implications

Warehouse managers can apply the methodology in their own situation if they systematically register demand forecasts, actual order sizes and labour productivity per warehouse stage. Application is illustrated for a single warehouse, and studies for alternative product categories and labour processes are of interest.

Practical implications

Intentional forecast bias can lead to smoother workflows in warehouses and thus result in higher labour efficiency. Required data include historical data on demand forecasts, order sizes and labour productivity. Implementation depends on labour hiring strategies and cost structures.

Originality/value

Operational data support evidence-based warehouse labour management. The case study validates earlier conceptual studies based on artificial data.

Details

International Journal of Physical Distribution & Logistics Management, vol. 48 no. 1
Type: Research Article
ISSN: 0960-0035

Keywords

Open Access
Article
Publication date: 11 March 2022

Ivo Hristov, Riccardo Camilli and Alessandro Mechelli

The purpose of this paper is twofold: to provide a clear picture on the cognitive biases affecting managers’ decision-making process of implementing a performance…

2155

Abstract

Purpose

The purpose of this paper is twofold: to provide a clear picture on the cognitive biases affecting managers’ decision-making process of implementing a performance management system (PMS), and to identify managerial practices, measures and the key challenges to manage the cognitive biases in the corporate strategy.

Design/methodology/approach

Semi-structured interviews, based on theoretical milestones of performance management and cognitive psychology, gathered from 104 experienced professionals’ evaluations on the likelihood and impact of managers’ cognitive biases in PMS implementation, potential solutions as well as drivers and connected criticalities.

Findings

Recurring cognitive biases, together with considerable impacts, emerged in the first, and most strategic, phases of the PMS implementation. The authors developed a roadmap to support corporate transition to integrate behavioral strategy into the PMS implementation aiming to achieve economically and efficiently sound performance.

Research limitations/implications

From the view of proper behavioral strategy affirmation in performance management literature, in a small way, the authors contribute to a desirable taxonomy of cognitive biases so differentiated decision-making scenarios may be built to compare results and draw new observations. Behavioral studies could transversally connect the cognitive biases of performance management to actors’ sociodemographic features and personality types. Practitioners may check biases affecting their organizations by means of the questionnaire and, consequently, adopt the framework illustrated to reduce them.

Originality/value

Performance management literature has constantly investigated positive and negative behavioral factors related to the PMS. This study, instead, makes a theoretical and methodological contribution to the PMS implementation as a decision-making process. The authors propose a theoretical framework that integrates cognitive psychology insights and applies measures to reduce biases.

Article
Publication date: 7 August 2017

Zamri Ahmad, Haslindar Ibrahim and Jasman Tuyon

This paper aims to explore the relevance of bounded rationality to the practice of institutional investors in Malaysia. Understanding institutional investor behavior is…

1627

Abstract

Purpose

This paper aims to explore the relevance of bounded rationality to the practice of institutional investors in Malaysia. Understanding institutional investor behavior is important, as it can determine the asset prices and consequently the market behavior.

Design/methodology/approach

A set of questionnaires is used to solicit information regarding the understanding and practical application of behavioral finance theories and strategies among fund managers in the Malaysian investment management practice. In the process, bounded rational theory is aimed to be validated. Fund managers’ possible bounded rational behavior is assessed with reference to their investment management approaches and strategies right from individual beliefs and acquisition of information, as well as investment management and strategies used.

Findings

The findings lend support to the notion that institutional investors too, being normal human beings, are expected to think and behave in a boundedly rational manner as postulated in bounded rational theory. The sources of bounded rationality are individual, institutional and social forces. Thus, portfolio trading and investment management strategies are exposed to wide varieties of behavioral risks. Despite the notions that behavioral risks are real and the impact on fund performance could be pervasive, fund managers’ self-awareness regarding control and institutional readiness to govern behavioral risks in investment practices is still low.

Research limitations/implications

Empirical evidence drawn in the current paper is subjected to small sample size and specific focus on Malaysian context. Despite this limitation, the sample is statistically sufficient and provides a fair representation, as well as quality opinions, of fund manager’s investment management behavior in Malaysia. This research provides valuable implications to practitioners (fund managers) and regulators (investment management and capital market policymakers). In practice, the current study draws some practical ideas, especially for buy-side institutional investors, on the source and impact of behavioral biases on fund management practices and performance. For regulators, this research highlighted the needs and possible ways to regulate these behavioral risks.

Originality/value

The current paper provides new insights on the theory and practice of the institutional investor. In theory, this research provides evidence of bounded rationality of institutional investor behavior, practicing in the asset management industry in the emerging markets of Malaysia. This evidence lends support to the validity of the bounded rationality theory in explaining institutional investor behavior. In practice, thisresearch provides new insights on the relevance of behavioral finance perspectives and strategies in the asset management industry practice and policy.

Details

Qualitative Research in Financial Markets, vol. 9 no. 3
Type: Research Article
ISSN: 1755-4179

Keywords

Article
Publication date: 19 June 2009

Niamh M. Brennan, Encarna Guillamon‐Saorin and Aileen Pierce

This paper aims to develop a holistic measure for analysing impression management and for detecting bias introduced into corporate narratives as a result of impression management.

11730

Abstract

Purpose

This paper aims to develop a holistic measure for analysing impression management and for detecting bias introduced into corporate narratives as a result of impression management.

Design/methodology/approach

Prior research on the seven impression management methods in the literature is summarised. Four of the less‐researched methods are described in detail, and are illustrated with examples from UK annual results' press releases (ARPRs). A method of computing a holistic composite impression management score based on these four impression management methods is developed, based on both quantitative and qualitative data in corporate narrative disclosures. An impression management bias score is devised to capture the extent to which impression management introduces bias into corporate narratives. An example of the application of the composite impression management score and impression management bias score methodology is provided.

Findings

While not amounting to systematic evidence, the 21 illustrative examples suggest that impression management is pervasive in corporate financial communications using multiple impression management methods, such that positive information is exaggerated, while negative information is either ignored or is underplayed.

Originality/value

Four impression management methods are described in detail, illustrated by 21 examples. These four methods are examined together. New impression management methods are studied in this paper for the first time. This paper extends prior impression management measures in two ways. First, a composite impression management score based on four impression management techniques is articulated. Second, the composite impression management score methodology is extended to capture a measure for bias, in the form of an impression management bias score. This is the first time outside the USA that narrative disclosures in press releases have been studied.

Details

Accounting, Auditing & Accountability Journal, vol. 22 no. 5
Type: Research Article
ISSN: 0951-3574

Keywords

Article
Publication date: 28 September 2018

Wei Xiong and Tao Wang

Feelings about conflict in labor relations are determined by both the objective conditions surrounding the dimension of labor relations and their subjective evaluation…

1050

Abstract

Purpose

Feelings about conflict in labor relations are determined by both the objective conditions surrounding the dimension of labor relations and their subjective evaluation. This study aims to examine features of the subjective evaluation factors in labor relations for new generation employees born in the post-1980s, transitional China, and to explore the conflict reduction strategies in labor relations.

Design/methodology/approach

This study designed items and a scale to measure employees’ subjective evaluation bias regarding labor relations, and conducted a survey of 1,500 employees in 80 Chinese enterprises. It conducted a principal components analysis of the subjective evaluation biases, and a covariance analysis to explore differences in the common factors between employees of two generations. Comparing the subjective bias with the objective status of labor relations, as well as with employers’ expectations, this study analyzed the feelings toward conflict and conflict management strategies.

Findings

There are eight common factors in the subjective evaluation bias toward labor relations, four of which show significant differences between employees of two generations. Employers should study these differences, and apply conflict reduction measures to manage labor relations.

Originality/value

This is one of the first studies to propose the concept of a subjective evaluation bias regarding labor relations, and examine the common factors and features among new generation employees. It establishes a model for feelings toward conflict through four combinations of the subjective preferences and objective status dimensions. This study offers new insights for reducing workplace conflict.

Details

International Journal of Conflict Management, vol. 29 no. 5
Type: Research Article
ISSN: 1044-4068

Keywords

Article
Publication date: 12 January 2021

Konrad Kulikowski

Despite evidence showing that cognitive biases – the systematic errors made by humans during cognitive processing, are prevalent among decision-makers, there is a lack of…

Abstract

Purpose

Despite evidence showing that cognitive biases – the systematic errors made by humans during cognitive processing, are prevalent among decision-makers, there is a lack of theoretical models providing insight into how these limitations of human mind might affect decisions made during performance management. This study aims to fill this gap and contribute to performance management scholarship by proposing a conceptual framework broadening our understanding of the role of cognitive biases in performance improvements practices and by highlighting remedies for cognitive biases.

Design/methodology/approach

Using benchmarking as an example, the authors integrate the knowledge from performance management and cognitive psychology literature. Examples of cognitive biases possible during benchmarking are used to illustrate how the limitations of human mind might have a critical role in performance management.

Findings

The cognitive biases might diminish the positive effect of performance improvement practice on organizational performance. As there is a prevalence of cognitive biases coupled with the inability of individuals to recognize and face them, the remedy for cognitive biases should be sought not at an individual but rather on an organizational level, in creating organizational cognitive biases policy (CBP).

Originality/value

The presented model provides new insights into the role of cognitive biases in performance management and allows seeing CBP as a safeguard against the effects of cognitive biases on performance. By referring to cognitive biases and CBP, our model also helps to understand why the same performance improvement practices might incite different opinions among decision-makers.

Details

International Journal of Productivity and Performance Management, vol. 71 no. 4
Type: Research Article
ISSN: 1741-0401

Keywords

Article
Publication date: 1 March 1991

Kristofer J. Fenlason

Evaluation of an individual's qualifications and performance is an integral part of entering and progressing through the ranks of most organizations. Yet, there are…

Abstract

Evaluation of an individual's qualifications and performance is an integral part of entering and progressing through the ranks of most organizations. Yet, there are indications that women in management are hampered by sex bias in evaluation situations (e.g., Heilman, 1984; Schein, 1973; Terborg, & Ilgen, 1975; Walsh, Weinberg, and Fairfield, 1987). Therefore, sex bias may be adversely affecting the personnel decision‐making processes and procedures that are often critical for establishing and maintaining a career in management.

Details

Equal Opportunities International, vol. 10 no. 3/4
Type: Research Article
ISSN: 0261-0159

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