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The Effect of Investor Status on Investors' Susceptibility to Earnings Fixation

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  • Ling L. Harris
  • Jessen L. Hobson
  • Kevin E. Jackson

Abstract

This study investigates whether an individual's status as a current or a prospective investor affects the investor's susceptibility to earnings fixation and proposes a mechanism to reduce earnings fixation. Our experimental results suggest that current investors are more susceptible to earnings fixation than prospective investors, and that current investors can reduce earnings fixation by explicitly forecasting future earnings as part of their evaluation process. We provide theory†consistent evidence that current investors' prevention focus makes them elevate the importance of summary earnings in their evaluation of a company. However, after forecasting future earnings, current investors view summary earnings as only one of several similarly important evaluation inputs rather than as one substantially more important input (relative to its components). Our study contributes to research on earnings fixation and investor status. We also contribute to practice by documenting the moderating effect of investor status on earnings fixation and by identifying a simple mechanism that current investors can use to reduce their susceptibility to earnings fixation.

Suggested Citation

  • Ling L. Harris & Jessen L. Hobson & Kevin E. Jackson, 2016. "The Effect of Investor Status on Investors' Susceptibility to Earnings Fixation," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 152-171, March.
    • Handle: RePEc:wly:coacre:v:33:y:2016:i:1:p:152-171
    DOI: 10.1111/1911-3846.12153
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    Cited by:

    1. Göttsche, Max & Habermann, Florian & Sieber, Sebastian, 2024. "The materiality of non-financial tax disclosure: Experimental evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    2. Eilifsen, Aasmund & Hamilton, Erin L. & Messier, William F., 2021. "The importance of quantifying uncertainty: Examining the effects of quantitative sensitivity analysis and audit materiality disclosures on investors’ judgments and decisions," Accounting, Organizations and Society, Elsevier, vol. 90(C).
    3. Wu, Xuan & Tian, Gaoliang & Li, Yueting & Zhou, Qing, 2019. "On the pricing of the persistence of earnings components in China," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 112-132.
    4. Austin, Chelsea Rae & Bobek, Donna D. & Harris, Ling L., 2021. "Does information about gender pay matter to investors? An experimental investigation," Accounting, Organizations and Society, Elsevier, vol. 90(C).
    5. Martin, Rachel, 2019. "Examination and implications of experimental research on investor perceptions," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 145-169.

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