A Cross-Modality Anchoring Bias as a Possible Cognitive Explanation for the Discretionary Accruals Anomaly

The accruals anomaly, a well-documented financial phenomenon lacking a comprehensive scientific explanation, is addressed in this study through the proposition of a novel behavioral theory. The theory centers around the concept of a cross-modality anchoring bias, wherein the mental anchor is the magnitude of operating income, modified by the intensity of discretionary accounting accruals. This anchoring effect distorts the distribution of future cash flows used in valuation processes, potentially explaining the anomaly's persistence and robustness. To test this theory, an experiment was conducted, involving participants with suitable financial knowledge and varying levels of practical experience. The experimental results support the presence of the cross-modality anchoring effect, as estimated future cash flows differed significantly across accruals categories, despite being drawn from the same distribution. The magnitude of the bias was influenced by the level of practical financial experience and gender, with women exhibiting lower susceptibility to the interdimensional anchor.