This paper presents some empirical results of a study predicting corporate failure as evidenced by the event of bankruptcy. There have been a fair number of previous studies in this field of research; the more notable published contributions are Beaver [1966; 1968a; 1968b], Altman [1968; 1973], Altman and Lorris [1976], Altman and McGough [1974], Altman, Haldeman, and Narayanan [1977], Deakin [1972], Libby [1975], Blum [1974], Edmister [1972], Wilcox [1973], Moyer [1977], and Lev [1971]. Two unpublished papers by White and Turnbull [1975a; 1975b] and a paper by Santomero and Vinso [1977] are of particular interest as they appear to be the first studies which logically and systematically develop probabilistic estimates of failure. The present study is similar to the latter studies, in that the methodology is one of maximum likelihood estimation of the so-called conditional logit model. The data set used in this study is from the seventies (1970-76). I know of only three corporate failure research studies which have examined data from this period. One is a limited study by Altman and McGough [1974] in which only failed firms were drawn from the period 1970-73 and only one type of classification error (misclassification of failed firms) was analyzed. Moyer [1977] considered the period 1965-75, but the sample of bankrupt firms was unusually small (twenty-seven firms). The

Financial ratios and the probabilistic prediction of bankruptcy

Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.

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Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be "loss averse," meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination "myopic loss aversion." Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually. There is an enormous discrepancy between the returns on stocks and fixed income securities. Since 1926 the annual real return on stocks has been about 7 percent, while the real return on treasury bills has been less than 1 percent. As demonstrated by Mehra and Prescott [1985], the combination of a high equity premium, a low risk-free rate, and smooth consumption is difficult to explain with plausible levels of investor risk aversion. Mehra and Prescott estimate that investors would have to have coefficients of relative risk aversion in excess of 30 to explain the historical equity premium, whereas previous estimates and theoretical arguments suggest that the actual figure is close to 1.0. We are left with a pair of questions: why is the equity premium so large, or why is anyone willing to hold bonds? The answer we propose in this paper is based on two concepts from the psychology of decision-making. The first concept is loss aversion. Loss aversion refers to the tendency for individuals to be more sensitive to reductions in their levels of well-being than to increases. The concept plays a central role in Kahneman and Tversky's [1979] descriptive theory of decision-making under

/pdf/myopic-loss-aversion-and-the-equity-premium-puzzle-btg26k9pxs.pdf

Myopic loss aversion and the equity premium puzzle

Combining forecasts: A review and annotated bibliography

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1004&context=accounting_papers

This paper uses recent experimental studies of financial accounting to illustrate our view of how such experiments can be conducted successfully. Rather than provide an exhaustive review of the literature, we focus on how particular examples illustrate successful use of experiments to determine how, when and (ultimately) why important features of financial accounting settings influence behavior. We first describe how changes in views of market efficiency, reliance on the experimentalist’s comparative advantage, new theories, and a focus on key institutional features have allowed researchers to overcome the criticisms of earlier financial accounting experiments. We then describe how specific streams of experimental financial accounting research have addressed questions about financial communication between managers, auditors, information intermediaries, and investors, and indicate how future research can extend those streams. We focus particularly on (1) how managers and auditors report information; (2) how users of financial information interpret those reports; (3) how individual decisions affect market behavior; and (4) how strategic interactions between information reporters and users can affect market outcomes. Our examples include and integrate experiments that fall into both the “behavioral” and “experimental economics” literatures in accounting. Finally, we discuss how experiments can be designed to be both effective and efficient.

https://educipta.com/wp-content/uploads/2014/09/Experimental-Research-in-Financial-Accounting.pdf

Experimental research in financial accounting

The goal of this paper is to trace the development of our conceptions of the roles of ability, knowledge, motivation, and environment as determinants of decision performance in accounting settings, and provide a synthesis of the basic constructs, conceptual relations, and methodological guidelines that can be inferred from this diverse literature. We first outline the key characteristics of accounting settings and research principles appropriate for examining the characteristics. The primary emphasis is on identifying interactions between determinants of performance, specifying underlying cognitive processes, and abstraction based on theory and task analysis. We then demonstrate how selected studies which follow these basic principles have greatly enhanced our understanding of accounting-related decisions. Finally, suggestions for future research are presented.

Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment☆

Determinants of judgment performance in accounting settings: Ability, knowledge, motivation

This study investigates how experience-related differences in the content and structure of auditors' knowledge of financial statement errors can contribute to the effectiveness and efficiency of their audit decisions. Different audit decision tasks are performed by auditors with differing levels of training and experience. Such differential assignment is specifically mandated in the first standard of fieldwork (AU Section 210), and observations of practice (e.g., Haskins [1987]) indicate some consensus in assignment patterns. The appropriateness of these differential assignments has economic consequences because of the higher salaries paid to more experienced auditors. The existence of differential costs and presumed performance differences increases the importance of appropriately linking training, experience, and the promotion selection process. Nevertheless, researchers have yet to document both reliable experience-related performance differences and the ability' and knowledge differences2

https://www.jstor.org/stable/pdfplus/2491154.pdf

Robert Libby

Papers

Experimental research in financial accounting

Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment☆

Determinants of judgment performance in accounting settings: Ability, knowledge, motivation

Experience and the Ability to Explain Audit Findings

Accounting and human information processing : theory and applications