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
Date Written: October 7, 2014
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: Suggested Citation