Time-Induced Fixation: The Case of Reporting a Change to the Fair-Value Presentation of Pension Expense

Abstract

U.S. accounting standards require full disclosure of the effects of an accounting change in the year the change is made, but not in future years. However, some accounting changes have multi-period effects. We conduct an experiment in which investors value a company that changed how it accounts for pension gains and losses. We examine investors’ valuation judgments over three consecutive reporting periods, and provide evidence that investors gradually forget to adjust for the accounting change over time under the current approach used to disclose accounting changes. These effects are mitigated in post-change periods when investors receive full disclosure of the current effect of the prior accounting change, and to a lesser extent when investors receive a disclosure that includes a simple reminder that the accounting change occurred. Supplemental analyses indicate that investors rely more on memory-aiding disclosures as the time lag between valuation judgments increases, and that disclosures of income-increasing accounting changes affect valuation adjustments in part by affecting investors’ trust in management.