The Effect of Alternative Accounting Measurement Bases on Financial Statement Userss Resource Allocation Decisions and Assessments of Managerss Stewardship

Abstract

We conduct a laboratory experiment to examine investors’ investment decisions and related assessments of managers’ stewardship. We provide evidence that investors’ stewardship assessments fall prey to correspondence bias; that is, investors attribute external (i.e., non-manager-related) causes of company performance to managers’ performance. We predict and find that fair value information enables investors to make better stewardship and investment decisions than investors with amortized cost information. We also find that investors presented with amortized-cost-based financial statements perform better to the extent they access fair-value-based footnote information, while investors presented with fair-value-based financial statements perform worse to the extent they access amortized-cost-based footnote information. Collectively, our results suggest that investors’ stewardship and investment decisions are improved because fair value information allows them to disentangle endogenous actions by managers from exogenous market forces that are outside of managers’ control, and thus mitigate correspondence bias.