Accounting Models and Experiments
Robert Bloomfield
Fall, 2001
3 Credits
Summary
This course provides an introduction to some of the important models used widely in accounting research. Most of the topics address issues in financial accounting, but we also have one session on auditing games and one session on managerial accounting games. Each day, we will cover one or two modeling papers on a particular topic, and one or two experimental tests of those models (or related models). The course is structured so that we cover relatively simple models in early weeks, and build to more complex models.
Weekly Assignments:
- Each week, there will be some assigned questions that you must hand in. Many times these questions will force you to walk through a simplified model step by step to find equilibria, etc. I assume no knowledge of game theory. However, I do assume that you can take simple derivatives and manipulate probability expression (particularly conditional probabilities).
- Every week has one or two student presenters. Prepare a 30-minute presentation of the paper, and expect to be interrupted.
Term Paper and Exam
- There is a final (take-home) exam—there will some questions you must answer, and a paper you will need to review (write only 2 or 3 pages, single spaced). You will be provided with the “Guidelines for review” from The Accounting Review, which you should follow as closely as you can.
- There is a final project—you must come up with an experimental test informed by economic theory. (It can also include psychology).
Scheduling
We will meet once per week, starting the week of September 10. We will meet 10-12 times during the Fall term. The exam will be handed out at the end of Fall term. We will then meet the remaining 2-4 times in late January, just before the Spring term begins. Those meetings will be devoted to presentation and discussion of your projects.
Reading List.
Papers in bold will be presented by a student. The additional readings are models and experiments that you might find interesting, and might form the basis of a project. I will hand out hard copies of all main readings and many additional readings. Assignment questions will be handed out as they become available.
Modeling, experiments and philosophy of science (sept 9)
Main Readings
Milton Friedman, Essays in Positive Economics, 1953, pp1-53
Smith, Vernon, 1982, Microeconomic systems as an experimental science, American Economic Review 72 (December): 923-55
William Kinney, 2001, Accounting Scholarship: What is Uniquely Ours? Accounting Review 76: 275-284.
Kachelmeier, S. (1996b). Discussion of "Tax Advice and Reporting Under Uncertainty: Theory and Experimental Evidence." Contemporary Accounting Research, 13: 81-90.
Bloomfield, Libby and Nelson, Experimental Research in Financial Accounting” Accounting, Organizations and Society, 2001 (forthcoming).
Kinney, W. R. (1986). Empirical Accounting Research Design for Ph.D. Students. The Accounting Review, 61 (2): 338-350.
Other Readings
Watts, R., and Zimmerman, J. (1986). Positive Accounting Research. Prentice Hall. Englewood Cliffs, NJ.
Smith, Vernon. (1976). Experimental Economics: Induced Value Theory. American Economic Review, 66: 274-279.
Donald McCloskey, The Rhetoric of Economics, Chapters 1-3.
Al Roth, 1988, Laboratory experimentation in economics: A methodological overview. Economic Journal 98:974-1031.
Moser, D. V. (1998). Using an Experimental Economics Approach in Behavioral Accounting Research. Behavioral Research in Accounting, 10 (Supplement): 94-110.
Haynes, C.M., and Kachelmeier, S.J. (1998). The Effects of Accounting Contexts on Accounting Decisions: A Synthesis of Cognitive and Economic Perspectives in Accounting Experimentation. Journal of Accounting Literature, 17: 97-136.
Camerer, C. (1997). Rules for Experimenting in Psychology and Economics, and Why They Differ. In Understanding Strategic Interaction : Essays in Honor of R Selten. Van Dam, et al., eds. Berlin ; New York : Springer.
Berg, J., Dickhaut, J., and McCabe, K. (1995). The Individual Versus the Aggregate. In Judgment and Decision-Making Research in Accounting and Auditing, Ashton, R. H. and Ashton, A. H. (Eds.) New York: Cambridge.
Kachelmeier, S., and Shehata, M. (1992). Examining Risk Preferences Under High Monetary Incentives: Experimental Evidence From the People’s Republic of China. The American Economic Review, 82: 1120-1141.
Auditor-Manager Games (sept 25—note no class sept 18)
Main Readings
Strategic Dependence and Inherent Risk Assessments, The Accounting Review, January 1995, 70:71-90.
Strategic Dependence and the Assessment of Fraud Risk: A Laboratory Study,” The Accounting Review, October 1997, 72:517-538.
Zimbelman, M. and W. Waller, 1999, An experimental investigation of auditor-auditee interaction under ambiguity, Journal of Accounting Research, Supplement 37:135-155
Bloomfield, Robert, A discussion of ‘An experimental investigation of auditor-auditee interaction under ambiguity,’” Journal of Accounting Research, Supplement, 37:157-165.
Other Readings
Pearce, D.G. (1984). Rationalizable Strategic Behavior and the Problem of Perfection. Econometrica, 52 (5): 1029-1050.
Tan, T.C., and Werlang, S. (1988). The Bayesian Foundations of Solution Concepts of Games. Journal of Economic Theory, 45 (2): 379-391.
Maynard Smith, J. (1982). Evolution and the Theory of Games, Cambridge University Press, Cambridge, UK.
Herrnstein, R., and Vaughn, W. (1980). Melioration and Behavioral Allocation. In Limits to Action: the Allocation of Individual Behavior. Edited By J. Staddon. New York, NY. Academic Press.
Bernheim, D. (1984). Rationalizable Strategic Behavior. Econometrica, 52 (5): 1007-1028.
Voluntary Disclosure with Anti-Fraud Rules (oct 2)
Main Readings
Verrecchia, R., 1983, Discretionary Disclosure, Journal of Accounting & Economics; 5 (December) 179-195.
Jung, W., and Kwon, Y. (1988). Disclosure When the Market Is Unsure of Information Endowment of Managers. Journal of Accounting Research, 26 (1): 146-153.
Wagenhofer, A. (1990). Voluntary Disclosure With A Strategic Opponent. Journal of Accounting and Economics, 12 (4): 341-363.
King, R. R., and Wallin, D. E. (1995). Experimental Tests of Disclosure With an Opponent. Journal of Accounting and Economics, 19 (1): 139-168.
King, R. R., and Wallin, D. E. (1991b). Voluntary Disclosures When Seller's Level of Information Is Unknown. Journal of Accounting Research, 29 (1): 96-108.
Other Readings
King, R. R., and Wallin, D. E. (1991a). Market-Induced Information Disclosures: An Experimental Markets Investigation. Contemporary Accounting Research, 8 (1): 170-197.
Bainbridge, Stephen, 2001, A Behavioral Economic Analysis of Mandatory Disclosure: A though experiment turned cautionary tale. Working Paper (SSRN).
Voluntary Disclosure without Anti-Fraud Rules (oct 16—note no class Oct 9)
Main Readings
Forsythe, R., Lundholm, R., and Reitz, T. (1999). Cheap Talk, Fraud and Adverse Selection in Financial Markets: Some Experimental Evidence. Review of Financial Studies, 12: 581-518.
Bloomfield and Kadiyali, 2000, How verifiable cheap-talk can communicate unverifiable information, December, 2000, working paper.
Crawford, V. and J. Sobel: "Strategic Information Transmission," Econometrica, 50 (November 1982), 1431-1451.
Farrell, J.: "Meaning and Credibility in Cheap Talk Games," Games and Economic Behavior, 5(1993), 514-531.
Other Readings
Dickhaut, J., K. McCabe and A. Mukherjee: "An Experimental Study of Strategic Information Transmission," University of Minnesota working paper, 1994.
Newman, P. and R. Sansing, 1993, Disclosure policies with multiple users Journal of Accounting Research, Spring 31 (1) 92-113.
Repeated Games (Oct 23)
Main Readings
Kachelmeier, S. and M. Shehata, 1997, Internal auditing and voluntary cooperation in firms: A cross-cultural experiment, The Accounting Review; 72(3) 407-431
King, R. R. (2001), An experimental investigation of self-serving biases in an auditing trust game: The effect of group affiliation. Working Paper, Washington University.
Bloomfield and Hales, 2000, Inducing reliable reporting, November, 2000.
Other Readings
King, R. R. (1996). Reputation Formation for Reliable Reporting: an Experimental Investigation. The Accounting Review, 71 (3): 375-396.
Bloomfield and O’Hara, 1999, Does Order Preferencing Matter? Journal of Financial Economics, October 1998, 50:3-37
Herding Games (Oct 30)
Main Readings
Banerjee, Abhijit, 1992, A simple model of herd behavior, The Quarterly Journal of Economics, Cambridge; Aug 1992; Vol. 108, Iss. 3; 797-817.
Rational herding in financial economics, Devenow, Andrea; Welch, Ivo 1996, European Economic Review; 40(3-5) 603-616
Allsopp, L. and J. Hey, 2000, Two experiments to test a model of herd behavior, Experimental Economics, 3 (2) 121-136, October.
Cote, J. and D. Sanders, 1997, Herding Behavior: Explanations and implications, Behavioral Research in Accounting Volume 9.
Other readings
Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation
The Journal of Finance; New York; Sep 1992; Froot, Kenneth A.; Scharfstein, David S.; Stein, Jeremy C.; 47(4) 1461-85
Security analysis and trading patterns when some investors receive information before others; Hirshleifer, David; Subrahmanyam, Avanidhar; Titman, Sheridan; The Journal of Finance, Cambridge; Dec 1994; Vol. 49, Iss. 5; pg. 1665
Avery, C. and P. Zemsky, 1998, Multidimensional uncertainty and herd behavior in finacial markets, The American Economic Review, 88 (4) 724-748
Incentive Contracting (Nov 6)
Main Readings
Holmstrom, B., 1979, Moral Hazard and Observability, Bell Journal of Economics, Spring 10 (1) 74-?
Baiman, S. and B. Lewis, 1989, An Experiment Testing The Behavioral Equivalence Of Strateg, Journal of Accounting Research 27 (1) 1-20.
Sprinkle, G., 2000, The effect of incentive contracts on learning and performance, The Accounting Review 75(3), July.
Bonner, S. and G. Sprinkle, The Effects of Monetary Incentives on Effort and Task Performance: Theories, Evidence, and a Framework for Research, July, Working Paper.
Other Readings
Baiman, S., 1990, Agency Research in Managerial Accounting: A Second Look, Accounting, Organizations and Society; 15(4) 341-372.
Baimain, S., 1982, Agency research in managerial accounting: A survey, Journal of Accounting Literature.
Demski, J. and D. Kreps, Models in managerial accounting, Journal of Accounting Research 117-160 (discussion by Chandra Kanodia).
Introduction to Markets (Nov 13)
Main Readings
Glosten-Milgrom 1985
Bloomfield, R. and M. O’Hara, Can Transparent Markets Survive? Journal of Financial Economics, March 2000, 55:425-459.
Bloomfield, R., Libby, R., and Nelson, M. W. (1996). Communication of Confidence as a Determinant of Group Judgment Accuracy. Organizational Behavior and Human Decision Processes, 68 (3): 287-300.
Grossman, S. and J. Stiglitz, On the Impossibility of Informationally Efficient Markets The American Economic Review; June 1980; 70(3) 393-?.
Black, Fisher, “Presidential Address Noise,” Journal of Finance 41:529-543.
Background Readings
De Long, J. B., Shleifer, A. Summers, L. H., and Waldmann, R. J. (1991). The Survival of Noise Traders in Financial Markets. The Journal of Business, 64 (1): 1-19.
Fischer, P., and Verrecchia, R. (1999). Public Information and Heuristic Trade. Journal of Accounting and Economics, 27 (1): 89-124.
Bloomfield, R. (1996b). Quotes, Prices and Estimates of Value in a Laboratory Market. Journal of Finance, 51 (5):1791-1808.
Camerer, C. (1992). The Rationality of Prices and Volume in Experimental Markets. Organizational Behavior and Human Decision Processes, 51 (2): 237-272.
Disclosure (Nov 20)
Main Readings
Diamond, D. and R. Verrecchia, 1991, Disclosure, Liquidity, and the Cost of Capital, The Journal of Finance, 46 (4). 1325-1360.
Bloomfield, R. and T. J. Wilks, 2000, Disclosure Effects in the Laboratory: Liquidity, Depth and the Cost of Capital, The Accounting Review, January, 2000 75(1):13-42.
Lundholm, R. J. (1991). What Affects the Efficiency of A Market? Some Answers From the Laboratory. The Accounting Review, 66 (3): 486-515.
Background Readings
Bloomfield, R. (1996a). The Interdependence of Reporting Discretion and Informational Efficiency in Laboratory Markets. The Accounting Review, 71 (4): 493-511.
Maribeth Coller, Information, Noise and Asset Markets: An experimental Study, Review of Accounting Studies, Volume 1 (1) 35-50.
Tucker, R. R. (1997). The Relationship Between Public and Private Information: An Experimental Markets Study. Behavioral Research in Accounting, 9: 219-249.
Responses to Earnings Announcements (Nov 27)
Main Readings
Kandel, E. and N. Pearson, 1995, Differential interpretation of public signals and trade in speculative markets, The Journal of Political Economy 103(4) 831-873, August.
Milgrom, P., and Stokey, N. (1982). Information, Trade and Common Knowledge. Journal of Economic Theory, 26 (1): 17-27.
Kim, O., and Verrecchia, R. (1994). Market Liquidity and Volume Around Earnings Announcements. Journal of Accounting and Economics, 17 (1,2): 41.
Gillette, A. B., Stevens, D. E., Watts, S. G., and Williams, A. W. (1999). Price and Volume Reactions to Public Information Releases: an Experimental Approach Incorporating Traders’ Subjective Beliefs. Contemporary Accounting Research, 16 (3): 437-479.
Arthur, W. B., J. Holland, B. LeBaron, R. Palmer and P. Tayler, 1996, Asset Pricing under endogenous expectations in an artificial stock market. Working Paper, Santa Fe Institute.
Background Readings
Differential Interpretations and Trading Volume, Journal of Financial and Quantitative Analysis, Vol 34, September 1999, Linda Bamber, Orie Barron and Thomas Stober
Barron, Kim, Lim and Stevens, 1998, Using Analysts' Forecasts to Measure Properties of Analysts' Information Environment, The Accounting Review (October).
Signaling Games (We will not cover these in class, but here is a reading list)
Trueman, Brett and S. Titman, 1988, An Explanation for Accounting Income Smoothing; Discussion, Journal of Accounting Research; 26(Supplement) 127-144.
Beck, P., J. Davis and W. Jung, 1996, Tax advice and reporting under uncertainty: Theory and experimental evidence, Contemporary Accounting Research; Spring 1996, 13 (1):49-81
Datar, Feltham and Hughes, 1991, The role of audits and audit quality in valuing new issues, Journal of Accounting and Economics 14, 3-49.
Mayhew, Schatzberg and Sevcik, Entrepreneur Choice of Auditor and Retained Ownership in IPO, Working Paper.
Berg. J., L. Daley, J. Dickhaut and J. O’Brien, 1986, Controlling preferences for lotteries on units of experimental exchange, Journal of Quarterly Economics, May 281-306.
Brandts, J. and C. Holt: "An Experimental Test of Equilibrium Dominance in Signaling Games, American Economic Review, 82 (1992), 1250-65.
Banks, J., C. Camerer and D. Porter: "Experimental Tests of Nash Refinements in Signaling Games," Games and Economic Behavior, 6 (1994), 1-31.