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The Psychological Attraction Approach to Accounting and Disclosure Policy

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Author Info
Hirshleifer, David
Teoh, Siew Hong

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Abstract

We offer here the psychological attraction approach to accounting and disclosure rules, regulation, and policy as a program for positive accounting research. We suggest that psychological forces have shaped and continue to shape rules and policies in two different ways. (1) Good Rules for Bad Users: rules and policies that provide information in a form that is useful for users who are subject to bias and cognitive processing constraints. (2) Bad Rules: superfluous or even pernicious rules and policies that result from psychological bias on the part of the ‘designers’ (managers, users, auditors, regulators, politicians, or voters). We offer some initial ideas about psychological sources of the use of historical costs, conservatism, aggregation, and a focus on downside outcomes in risk disclosures. We also suggest that psychological forces cause informal shifts in reporting and disclosure regulation and policy, which can exacerbate boom/bust patterns in financial markets.

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File URL: http://mpra.ub.uni-muenchen.de/14046/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14046.

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Date of creation: 11 Mar 2009
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Handle: RePEc:pra:mprapa:14046

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Related research
Keywords: Investor psychology; accounting regulation; disclosure policy; salience; omission bias; scapegoating; limited attention; overconfidence; conservatism; loss aversion; accrual; smoothing; mental accounting; historical cost; risk disclosure; value-at-risk.;

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Find related papers by JEL classification:
M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
M4 - Business Administration and Business Economics; Marketing; Accounting - - Accounting
H10 - Public Economics - - Structure and Scope of Government - - - General
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G0 - Financial Economics - - General

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  2. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, 04. [Downloadable!] (restricted)
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    Other versions:
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