The Effect of Alternative Accounting Measurement Bases on Investors’ Resource Allocation Decisions and Assessments of Managers’ Stewardship

Posted: 3 Jun 2014 Last revised: 10 May 2019

See all articles by Spencer B. Anderson

Spencer B. Anderson

University of Illinois at Urbana-Champaign - Department of Accountancy

Jason Brown

Indiana University - Kelley School of Business - Department of Accounting; Indiana University

Leslie D. Hodder

Indiana University - Kelley School of Business - Department of Accounting

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting

Date Written: October 7, 2014

Abstract

We conduct a laboratory experiment to examine investors’ investment decisions and related assessments of managers’ stewardship. We provide evidence that investors’ stewardship assessments fall prey to correspondence bias; that is, investors attribute external (i.e., non-manager-related) causes of company performance to managers’ performance. We predict and find that fair value information enables investors to make better stewardship and investment decisions than investors with amortized cost information. We also find that investors presented with amortized-cost-based financial statements perform better to the extent they access fair-value-based footnote information, while investors presented with fair-value-based financial statements perform worse to the extent they access amortized-cost-based footnote information. Collectively, our results suggest that investors’ stewardship and investment decisions are improved because fair value information allows them to disentangle endogenous actions by managers from exogenous market forces that are outside of managers’ control, and thus mitigate correspondence bias.

Keywords: Stewardship, fair value, experimental market, transparency, comparability, correspondence bias

JEL Classification: M40, M41

Suggested Citation

Anderson, Spencer B. and Brown, Jason and Davis Hodder, Leslie D. and Hopkins, Patrick E., The Effect of Alternative Accounting Measurement Bases on Investors’ Resource Allocation Decisions and Assessments of Managers’ Stewardship (October 7, 2014). Available at SSRN: https://ssrn.com/abstract=2445484 or http://dx.doi.org/10.2139/ssrn.2445484

Spencer B. Anderson

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jason Brown

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

Leslie D. Davis Hodder

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Patrick E. Hopkins (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

Kelley School of Business
1309 E. 10th Street
Bloomington, IN 47405
United States
812-855 2617 (Phone)
812-855 8679 (Fax)

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