Ahmed & Duellman (2012)
3 important questions on Ahmed & Duellman (2012)
What is/are the judgment(s) or decision(s) that are studied in this paper?
The primary decision studied in this paper is the choice of accounting technique (conservatism accounting or not) in a context where managers are overconfident. Further, the examine whether external monitoring has an effect on the relationship between overconfidence and accounting conservatism.
What is/are the (normative) benchmark(s) against which the judgment(s) or decision(s) are compared?
The normative benchmark against which the decision is compared is accounting conservatism.
The paper elaborates on the type of accounting conservatism, conditional and unconditional, and tests the relation of both types with managerial overconfidence. Conditional conservatism has to do with the accounting treatment of gains losses and unconditional conservatism with asset/liability values estimates.
The study concludes that manager overconfidence is negatively correlated with both types.
What is / are the behavioral factor(s) that affect the judgment(s) / decision(s)?
The behavioral factor that affects the accounting treatment decision is the overconfidence of managers. Overconfidence of managers makes them view the firm in better financial shape than it actually is and can lead them to undertake projects that will not be beneficial for the firm. A fundamental assumption in this paper is that overconfident managers that overestimate future returns will likely use over-optimistic asset value estimates and probably delay the recognition of projects’ losses. These actions will motivate managers not to undertake the normative benchmark, accounting conservatism.
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