Research Briefs

2022 College of Business Research Excellence Award Recipients — Presented at the Tenorio Research Lecture Event

This year’s research excellence award recipients explore topics relating to financial literacy, how mindset impacts risk assessment, social responsibility in the marketplace and stock performance.

DR. LEON CHEN, Professor of Finance and

DR. FERDINAND SIAGIAN, Associate Professor of Accounting

Analysts’ Target Price, Stock Performance and Real Earnings Management

We examine whether firm-level real earnings management (REM) activities have impact on future stock analysts’ target prices and future stock performance. Using the data of 1,775 U.S. firms during the period of 1999-2020, we find evidence that firms with higher REM activities in the previous fiscal year are associated with higher target-price implied 12-month ahead stock returns and higher dispersion of analysts’ estimates in the current year. Our results suggest that REM activities increase both analysts’ optimism and information asymmetry. We also document that firms with higher REM activities are associated with higher future 12-month stock returns, as well as higher future stock returns in excess of the target-price implied returns.

DR. ISHUAN LI SIMONSON

Professor of Finance

The Impact of Financial Literacy on Sub-Prime Mortgage Decisions

We explore the topic of financial literacy on the likelihood of choosing sub-optimal mortgage instruments (interest-only, adjustable mortgage rates) in residential mortgages in the United States. The Survey of Consumer Finance, 2016 and 2019, conducted by the Board of the Federal Reserve, includes for the first time the Big Three questions that make up the core of financial literacy questionnaires. This paper asks: Do financial literacy scores explain individual choices of sub-optimal mortgage choices in housing loans in the United States; and Do self-assessed financial risk tolerance and financial knowledge levels predict likelihood of taking riskier mortgage types by men compared to women? To answer these questions, we expand on the work from Agarwal and Mazumder (2013) and Lusardi and Tufano (2009). The empirical work includes ivprobit and Propensity Score Matching models.

DR. KRISTIN SCOTT

Professor of Marketing

The Compassionate Consumer: Values and Behaviors in the Marketplace

Companies have learned that consumers expect them to be socially responsible, going beyond acting legally to behaving ethically and philanthropically. This evidence suggests that there may be a deeper personality trait that increases the likelihood that consumers will exhibit pro-social or pro-environmental purchase behaviors. This research seeks to explore the role of compassion in consumption and to understand whether it might be a more fundamental motivation for a variety of consumption behaviors. Our first study found that compassion appears to motivate consumers to be ethical themselves and buy from companies that are socially responsible. However, somewhat surprisingly, we find that compassion is not related to purchasing environmentally friendly or fair-trade products, suggesting a more nuanced view of compassion’s effect on consumer behavior. Our second study will explore two additional research questions using an experimental design: When should compassion be used to encourage consumers to purchase products or donate to a charity? Can companies be seen as being compassionate and how does this impact subsequent consumer behaviors? We believe that compassion will continue to play a role in the marketplace as topics such as the covid pandemic and climate change continue.

DR. BYRON PIKE

Associate Professor of Accounting

The Effect of a Deliberative versus an Implemental Mindset on Auditors’ Fraud Risk Assessments

Financial Statement Auditors (hereafter auditors) are responsible for detecting all material misstatements, whether derived from error or fraud. Unfortunately, auditors struggle to identify and respond to the warning signs of fraud. Some ponder whether auditors possess the necessary expertise to appropriately evaluate and detect fraud. A forthcoming publication finds that auditors can indeed improve their fraud detection performance if they adopt the perspective of a forensic specialist. What is less understood are the cognitive mechanics of why the forensic perspective improves auditors’ fraud detection. In this study, we apply the theory of mindsets to further understand the cognitive approach that best aids auditors in their fraud detection performance. In an experimental setting, we plan to encourage participants to adopt either a deliberative or implemental mindset and then evaluate their performance on a fraud case where a business has many cues of potential fraud. Given its profound impact on mitigating the possibility of fraud, we will also manipulate control risk, whereby the entity will either have (or lack) adequate internal controls. The results will not only inform the preferred cognitive approach for auditors to detect fraud but also will lay the foundation for future decision aids or interventions that can improve the performance of auditors in practice.