In GAAP we trust: Examining how trust influences nonprofessional investor decisions under rules-based and principles-based standards

Wendy J. Bailey, Kimberly M. Sawers

Research output: Contribution to journalArticle

10 Scopus citations

Abstract

In this study, we investigate whether and how trust in our current, more rules-based financial reporting system and type of accounting standard affects nonprofessional investor decision making. In an experiment, 151 nonprofessional investors analyzed two companies that were economically identical except for a single underlying financial reporting difference that allowed one company to more positively report its financial results. By itself, the type of standard (rules-based, principles-based) did not affect investment choices or allocation decisions. However, when trust was considered, nonprofessional investors who are less trusting of our current financial reporting system chose to invest in a company with more positive financial results only when evaluating principles-based financial statements. Conversely, the type of standard did not affect investor decision making for nonprofessional investors who trust our current financial reporting system. These results have implications for standard setters as we move to a more principles-based accounting system.

Original languageEnglish (US)
Pages (from-to)25-46
Number of pages22
JournalBehavioral Research in Accounting
Volume24
Issue number1
DOIs
StatePublished - Mar 1 2012
Externally publishedYes

Keywords

  • Institutional trust
  • Principles-based standards
  • Procedural justice
  • Rules-based standards

ASJC Scopus subject areas

  • Accounting
  • Organizational Behavior and Human Resource Management

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