The research helps identify conditions under which financial statement users are more likely to detect accounting and disclosure choices that are seemingly intended to misrepresent firms’ financial positions.  The evidence indicates that participants in the experiment do not naturally adjust for financial statement impact. These participants perceive a deficiency in management credibility only when they understand both the financial statement impact of an incentive-consistent accounting choice and believe that management has not been forthcoming about that choice.  The research suggests that investors make credibility judgments based on the forthcomingness of corporate disclosure as well as on what they understand about managers’ choices from the broader information environment.

For more information on this study, please contact Susan Krische.

Krische, S. D., P. R. Sanders, and S. D. Smith.  2014.  Management credibility and investment risk: An experimental investigation of lease accounting alternatives.  Behavioral Research in Accounting 26 (1): 109-130.

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