Behavioral Accounting Research Framework

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A Proposed Framework for BehavioralAccounting Research

Jacob G. Birnberg

University of Pittsburgh

ABSTRACT: Behavioral accounting research BAR is richer today, in the topics cov-

ered, the methods used, and the range of sub-areas of accounting in which it is per-

formed, than ever before. This paper offers a framework within which BAR literature can

be viewed as a whole rather than in segments, such as by accounting sub-areas or by

research method. The framework classifies BAR by the focus of the research: theindividual, group, organization, or the society within which accounting exists. The pur-

pose of the framework is to help researchers in BAR to appreciate the insights to their

research questions that can be found in BAR using another research method or study-

ing a similar issue in another sub-area of accounting. Existing research in each of these

four areas is discussed to illustrate the usefulness of the framework. In addition, be-

havioral research in other disciplines that could impact BAR and areas of potential

future research are discussed.

Keywords: behavioral accounting research.

INTRODUCTION

In the 20 or so years since Birnberg and Shields 1989 reviewed behavioral accounting re-

search BAR, the area of applied behavioral research in general and BAR in particular has

burgeoned. The BAR literature has grown in breadth, depth, and complexity. This change

reflects an important trend in BAR: the reference disciplines and the object of accounting and

nonaccounting behavioral researchers have broadened.

The behavioral decision-making and cognitive psychology literatures that stimulated a sig-

nificant portion of the emerging BAR research up to the late 1980s continue to have a significant

influence on BAR e.g., Camerer 2001. In addition, the role of behavioral research has grown in

other social science disciplines. Experimental economics has moved into the mainstream e.g.,

McCaffery and Slemrod 2006. This literature has had an impact on BAR Moser 1998; Callahan

et al. 2006. Legal researchers, heavily influenced by the writings of Kahneman and Tversky e.g.,

Kahneman and Tversky 1979, have begun to actively pursue behavioral issues see Sunstein

2000. A strong behavioral school even has developed within finance e.g., Thaler 1993; Barberis

and Thaler 2003. Medical researchers have joined with behavioral researchers to investigate

The author thanks the two reviewers for their insightful comments, the editor for the paper, Bryan Church, not only for allhis help, but also for his patience, and numerous colleagues for their help along the way.

A dagger † at the end of select references indicates a review of the literature or a paper that includes an extensive set of

references.

BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting AssociationVol. 23, No. 1 DOI: 10.2308/bria.2011.23.1.12011 pp. 1–43

Published Online: February 2011

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issues such as how individuals react to prospective changes in the state of their health Udel et al.

2005. Even philosophy has developed a set of experimental researchers Knobe 2003; Appiah

2007 and a journal. Emerging methods for researching old questions are altering the form of

behavioral research, such as neuroeconomics Knudsen et al. 2007. These new tools permit

researchers to go beyond the observed behaviors of the decision makers and penetrate the “black

box”: that is, observe the brain’s activity during decision making. Finally, these new behavioral

researchers include economic modelers who have developed richer models of economic decision

makers “economic man” intended to explain behaviors such as cooperation e.g., Rabin 1993,

1998, and empiricists who have utilized aggregated data to test these models e.g., La Porta et al.

1997; Ittner 2007.

The burgeoning of BAR and the expansion of disciplines that in one form or another have

added “behavioral” as an adjective to one of their sub-disciplines has enriched the extant research

on which BAR can draw e.g., Dickhaut et al. 2003; Hannan 2005. However, the increased

interest and diversity of methods used to research behavioral issues also leads to a blurring of the

definition of “behavioral research” in general and the boundaries of BAR in particular. What was

relatively clear 20 years ago is less clear today. The proliferation of research methods has meant

that BAR is more than laboratory experiments, surveys, and the occasional field study. A varietyof archival databases have been used to investigate essentially behavioral issues Banker et al.

2000b; Ittner 2007. Even efficient markets researchers, who would not be considered part of the

BAR community, are identifying and researching issues that clearly are intended to understand

individual investors’ behaviors: most notably, anomalous behavior relative to the predictions of the

efficient market Sloan 1996.

This blurring of boundaries between research thrusts has led to an often unrecognized degree

of commonality across BAR thrusts. While this has obvious potential benefits that will be dis-

cussed latter, it means the boundaries used in this paper necessarily are arbitrary and subjective. In

general, the questions studied and the papers cited will be related to the actual behavior of people,

whether it is as individuals or collectivities of varying degrees of size or complexity e.g., groups

or organizations, as they interact with each other and/or their environment. The test used in this

paper is analogous to one offered as an operational definition of obscenity: We know BAR whenwe see it. At the margin different people will draw the line in different places. However, there is

little disagreement in the core of the research.

Given the growth in BAR, any attempt to provide a detailed review of BAR in general would

lead to a paper far beyond one this author could be expected to competently produce. Moreover,

recently a significant number of specialized reviews have been published offering the potentially

interested reader a wide variety of in-depth studies of BAR by both research topic e.g., auditing,

management accounting and research method e.g., laboratory experiments, field research. These

reviews are cited in this paper where appropriate and review papers, or those with particularly

useful reviews of the literature, are identified in the reference section of this paper.

What would appear to be needed at this point in time is a framework within which the reader

can integrate the diverse studies making up BAR. To do this, I will present a framework that

focuses on the reference group of the studies, highlighting examples of research conducted in eachfocal domain using different research methods and from different accounting sub-fields within

BAR. This approach not only is more parsimonious, but also permits the highlighting of a critical

facet of any research: complementarities of BAR across accounting sub-fields and methods. For

example, a paper dealing with audit teams may inform researchers interested in teams in manage-

ment accounting, and a field study may provide a laboratory researcher with the insight needed to

design a better experiment.

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The paper consists of six sections. The first provides an overview of the paper and the

framework used. The second through fifth sections discuss each of the broad categories of studies

in the framework. The final section offers a brief summary of the paper.

ORGANIZATION AND SCOPE OF THE REVIEWThe approach used in this paper to categorize BAR is the behavioral unit that is the object of

the research. Does the research study the behavior of an individual, group, etc.? Organizing studies

in this manner highlights the similarities across otherwise diverse studies and is intended to

facilitate intellectual exchange among accounting researchers. To do this, I must necessarily re-

strict the depth of the review in any section to accommodate the desired breadth of coverage. The

framework is described in the next section. Like BAR, the boundaries between these categories at

times are subjective. For example, a paper may cover issues appropriate for understanding both

groups and organizations Anderson et al. 2002.

Framework

I have elected to view the extant BAR by what I have labeled its “focus.” I define focus as the

unit used to analyze the research questions. The units range from the study of individuals to the

study of the environment that acts upon accounting or that accounting helps to shape. The fourcategories used in this review were selected because they define distinct sets of research

questions.1

The categories include:

• individuals,

• small groups,

• organizations, and

• environmental conditions.

Because a study’s classification is determined by the set of individuals it considers in the

research questions and/or the analysis, the categories can be viewed as constituting a series of

concentric circles, with the innermost circles representing the more micro studies. The outer

“rings” represent more macro studies reflecting the broader focus of the research questions. The

environmental conditions category can be interpreted as the “world” within which all other events

occur. Two important points should be noted. First, within the categories, particularly the indi-vidual category, there may be sub-categories. Second, studies from one category may inform

studies in another, likely adjacent category.

Definition and Discussion of the Categories

Individuals. These studies focus on the characteristics of a single actor and/or that actor’sresponse to a particular accounting data set, accounting-related stimulus, or accounting-related

setting. It is by far the most active of the BAR categories discussed in this paper and can be

viewed as consisting of its own sub-categories. One line of individual research can be character-

ized by a concern with how individuals solve problems. I label these “pure choice” studies because

they focus on how well any actor can solve a problem without consideration being given to the

behavior of other actors. Recently, many of these studies have investigated the manner in which

the economic model “economic man” in some significant way does not fit the behavior we

observe.The second line of research explicitly considers the role of strategic behavior in the actor’s

1 This organization is similar to Hopwood’s 1976, 5 Figure 1.1 describing the social context of accounting. He had fourcategories: individual needs, group pressures and control, organizational structures and control strategies, and the socialeconomic environment. The organization used here differs from Hopwood’s by recognizing differences within the grouppressures and control categories between individuals and groups. This reflects changes in BAR over the decades.

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decision. In these studies the actor explicitly should consider the behavior of a second actor who

actually is present in the setting. These studies would include negotiation e.g., Fisher et al. 2000

or “cheap talk” e.g., Zhang 2008. I label these “strategic studies.”

Groups. Research classified as covering groups includes those studies where the relevant unit

of analysis consists of a small number of individuals. Typically, the members will be viewed bythe organization as affiliated i.e., as acting in concert in some significant way. Thus, what

differentiates group research from research studying participants individually or strategically in-

teracting in dyads is the affiliation of the members. The actors are assumed to be in the same unit

at the time of the study. This would exclude studies such as those where the individuals are located

in different levels in a hierarchy. It is distinguished from research on organizations on two dimen-

sions. One is pragmatic. Groups are small enough to permit the researcher to study the interaction

among the multiple participants. As the size of the group increases, researchers find it more

difficult to create and/or analyze the interactions process and the focus of the research shifts from

the members of the group/organization to the organization itself. The other distinction is the focus

of the research. While group research is concerned with the activities of the group’s members,

organization research is concerned with the role of policy or the effect of characteristics of the

organization or its environment on the organization’s accounting policy or the organization as a

whole. This reflects a higher level of aggregation where the behavior of the individuals is lost. For

practical purposes the upper limit of group research usually is relatively small, typically four.

Organizations. As noted above, the focus of this research is on the characteristics of the unit.The entity studied may be described by the legal boundaries of a firm or a division within a larger

entity. The research question often is the role played by structural characteristics such as task

complexity or the organization’s accounting system design. These studies move us farther away

from the characteristics of the individual discussed in the two previous categories. It identifies the

individuals/groups that compose the organization by the roles they occupy rather than by focusing

on the characteristics/actions of the individuals who occupy them.

Environmental conditions. These studies examine the role of accounting in society. Studiesincluded in this category reflect the interaction between accounting and society: that is, the broader

world of which accounting is a part. The interaction can take the form of the external forces that

shape accounting, as well as studies of the role accounting has played in shaping the world inwhich we live. The former may be closely related to BAR studies in organizations. For example,

Prime Minister Margaret Thatcher’s intention to privatize British Rail affected the relative roles of

accounting and engineering within the organization Dent 1991, or the potential impact of the

whistleblower provisions of Sarbanes-Oxley Hunton and Rose 2010; DeZoort et al. 2008. How

the institution of standards for outputs led to the establishing of standard sizes for clothing Jeacle

2003a is an example of how developments in accounting standard costs can lead to changes in

the environment standard sizes.

INDIVIDUALS

The earliest BAR studies across all accounting areas were of this type and it continues to be

the dominant form of BAR. Shields 2007 reported that 90 percent of the papers published in

BRIA from 2004 to 2007 studied the behavior of the individual. As noted earlier, studies of the

individual are of two types: individual choice studies and strategic studies. While the two share acommon core of issues such as the selection of participants and the research methods utilized, they

are significantly different in many other ways. Thus, this section of the paper is organized in a

slightly different manner than those discussing the other elements of the framework. The first

sub-section discusses issues common to both. The second sub-section discusses elements specific

to individual choice studies, and the third sub-section does the same for strategic choice studies.

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Common Issues

The two types of individual choice studies share many common features. These include the

research method selected and the choice of participants. Each of these is discussed below. The

section also discusses differences between the traditional economic model of self-interested be-

havior and recent findings in the areas of interpersonal utility, trust, and cooperation found in this

research.

Research Methods

The individual choice studies consist predominately of experiments, though some utilize

surveys Shields 2007. Experiments are particularly appropriate when the relevant dimensions of

the decision environment in which the decision maker interacts with the stimulus and makes the

decision are well known. Experiments have been used in BAR to examine a wide variety of

questions, including internal policies, external policies, tax reporting policies, incentive systems,

various types of resource allocation decisions, ethical issues, and various types of reports. The

responses measured have varied from objective outcomes such as investment decisions Libby and

Tan 1999 to more subjective perceptions such as fairness Evans et al. 2005 or trust Coletti et

al. 2005. Overall, studies of this type are the predominant form of research in BAR, particularlyNorth American BAR, and can be found across a wide variety of topics, accounting sub-areas, and

settings.

Individual choice studies also utilize surveys e.g., Chalos and Poon 2000; Clinton and

Hunton 2001 and archival data e.g., Banker et al. 2000a. Archival studies often reflect a natu-

rally occurring experiment that permits the researcher to study behavior before and after the

change “stimulus” has taken place.

Participants

A significant shift has taken place in the nature of the participants used in experimental

studies. Participants in the early studies most often were students undergraduate business majors

and/or M.B.A. students. BAR studies of the individual over the past two decades, however, have

required and utilized professionals as participants to a far greater degree. This is a significantdifference from the disciplines from which BAR draws its theories e.g., psychology, where the

generic participant remains the norm. This reflects the differences in the two groups’ reference

populations for external validity. The use of professionals as participants became necessary when

BAR shifted from its initial focus of “how participants respond while playing a particular role” to

“whether the skills accumulated by professionals insulate them from the negative effects of heu-

ristics and biases when performing complex tasks” e.g., Libby and Trotman 1993; Kennedy

1993. Students cannot simulate that accumulated experience or professional knowledge, nor can

a mundane experimental task provide insight into the professional’s work.

The use of professional participants in BAR implicitly assumes that the professional’s behav-

ior in an experimental setting accurately reflects their behavior “on the job.” Fehr and Leibbrandt

2008 address this issue. They examine the cooperating behavior of fishermen both in a labora-

tory trust experiment and their level of cooperation to avoid over-fishing a given area. They findthat the participants’ behavior in the experimental setting accurately predicted their work behavior.

The broadening of the issues covered by BAR has expanded the type of professional partici-

pants required. The revival of interest in financial BAR now requires participants possessing

accounting expertise. BAR investigating proposed changes in the accounting rules requires

sophisticated/expert participants to test the validity of the hypotheses and enhance the study’s

external validity e.g., Hirst and Hopkins 1998. This also is true of BAR investigating anomalies




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motivator of choice; the other is the use of monetary outcomes as the sole basis for measuring the

utility of an outcome. While it is possible to integrate these arguments into the utility function

e.g., Birnberg and Snodgrass 1988; Luft 1997; Casadesus-Masanell 2004, BAR tends to view

these dimensions as if they are constraints on the individual’s wealth-maximizing behavior.

Typically, BAR studies of this type bring together literature from psychology and experimen-tal economics. They stress that rather than behave in a self-interested manner, individuals conform

to certain social norms such as fairness, equity, trust, honesty, or a willingness to cooperate. For a

discussion of these issues, see Camerer 2001, Rabin 1993, 1998, Fehr and Gaechter 2000,

Fehr and Schmidt 1999, Moser 1998, Evans et al. 2001, Evans et al. 2005, and Dawes and

Thaler 1988. Another dimension related to fairness and equity but not explicitly discussed in

BAR is egalitarianism Dawes et al. 2007. Overall, these studies are important for BAR for two

reasons. First, they show how little it takes for the participants to exhibit non-self-interested

behavior. Second, they show the importance of the individual’s perception of equal/fair treatment

relative to his or her peers and how they respond to a lack of perceived equity/fairness. Trust is of

interest to behavioral researchers of all types Rousseau et al. 1998; Sapienza et al. 2007. In BAR,

Rose 2007 examined how management’s financial reporting behavior affected the investors’

willingness to trust them. Evans et al. 2001 focus on the individual in a management accounting

environment and show that individuals will behave honestly in a setting where their dishonest

behavior would not be detected , thereby violating the self-interest assumption. As a possible

explanation of this type of behavior, Rutledge and Karim 1999 found that those participants who

did not exploit their asymmetric information in a principal-agent setting scored higher on ethical

development than those who did. Their research and many other papers suggest that non-totally

self-interested behavior is the norm or “default” behavior for many individuals and in many

settings, rather than the self-interested behavior postulated in traditional economic theory. A pos-

sible explanation for this behavior is their perception of whether they were treated fairly e.g.,

Greenberg 1990; Hannan 2005.

These findings can lead to interesting research on the individual’s response to their absence of

fairness. Remindful of Lucy van Pelt and Charlie Brown’s ongoing “relationship” over his kicking

the football, Bohnet and Zeckhauser 2004 report that decision makers exhibit an aversion to

betrayal and take actions to avoid it. Wang 2007 examines the symmetry between the punish-ment for dishonesty and the reward for honesty. She finds that honesty is rewarded more gener-

ously than dishonesty is punished. Issues of this type can be related to resource allocation in

managerial accounting and client behavior in auditing. In both cases, the research question would

involve identifying which behaviors lead to trust or distrust between the parties. What causes an

auditor to trust one client more than another? What causes a superior manager or auditor to trust

a particular subordinate?

Any trust-oriented research raises at least two questions related to experimental design. One

is the importance of the experiment’s context degree of realism and the choice of participants

students or professionals used in the study. The other is the importance of the presence or

absence of the interaction with a real person when the participant is told of the existence of

another participant. The latter issue is discussed under strategic choice situations.

Culture and Its Impact on Decision MakersBAR studies dealing with social norms and potentially differing values across cultures ask

whether differences in culture result in different decisions/behaviors. For the most part, these

studies have utilized the framework of Hofstede 1980. However, it is important to be aware that

some issues have been raised about the appropriateness of his categories e.g., Baskerville 2003;

McSweeney 2002. Because of the readily apparent cultural differences, the greatest portion of

this research has compared Asian and North American workers e.g., Birnberg and Snodgrass




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1988; Chow et al. 1999. Thus far, the studies are inconclusive. While some of the studies have

found differences consistent with their predictions e.g., Kachelmeier and Shehata 1997, others

have not Birnberg et al. 2008. In an interesting archival financial accounting study related to

BAR, Doupnik 2008 finds inter-country differences in earnings management after allowing for

differences for legal regimes.The potential role of national cultures is becoming more important as BAR internationalizes

and research findings reported by researchers from many different countries appear in journals and

SSRN. This raises the following question. Are research findings from one country universally

applicable or should we be concerned and replicate them before we accept their universality?

As management systems and styles “internationalize” in large, industrialized economies, it

may mitigate concerns over cross-cultural differences. However, this homogeneity may not be

present in small-scale economies. In contrast to results reported in some BAR, Henrich and the

Cross Cultural Ultimatum Game Research Group conducted an extensive study across 15 small-

scale economies. Their study is important because they examine behavior among economies

where the variation in economic development is far greater than those typically studied by BAR.

Using the dictator game and a social dilemma game, as well as the ultimatum game, they report

that the “textbook economic model” failed to predict the observed behavior. Their results arereported in various forms Henrich et al. 2005, 2001, as well as in Henrich’s 2007 plenary

address at the AAA’s 2007 annual meeting. They conclude behavior in the experiments is gener-

ally consistent with economic patterns of everyday life in these societies. Henrich et al. 2001,

73–74 report that, “The higher the degree of market integration in their society and the higher

the payoffs to cooperation in their society, the greater the level of cooperation in experimental

games.”

Summary

While the methods used to study individual behavior have not changed significantly since

Birnberg and Shields 1989, BAR has paralleled the trend found in experimental economics. A

significant portion of BAR now focuses on factors that influence decision makers in directions at

odds with the self-interest and wealth-maximizing assumptions. These noneconomic dimensions

include trusting behavior, cooperation, and the expectation of a fair share of any rewards. Incertain settings this can lead to greater monetary returns to the decision maker. However, they also

can expose the decision maker to greater risk. Other characteristics of the “work environment,”

such as the national/local culture, also can affect the expectations and behavior of the decision

maker. It has been suggested that certain of the cultural differences observed in individuals may be

based on different market conditions among countries.

Individual Choice Studies

There are a variety of reasons for the popularity of individual-focused research in BAR. The

first is simplicity. Considering the individual investor, auditor, etc., in isolation lends simplicity to

both the study’s research model and its design. It also simplifies the analysis and interpretation of

the results. The second is parsimony. It takes the fewest number of participants to achieve the

desired number of observations per cell. This is especially important when the participants areprofessionals. The third reflects the models generated in the disciplines on which BAR has drawn

most heavily economics and psychology. Both contain a significant literature relating to how the

individual makes a decision. Sociology and organization theory consider the “group” to be the

smallest unit and have been drawn on by BAR to a significantly lesser extent.

Individual choice studies in BAR can be divided into two types, depending on the type of

variable investigated. One group of studies is interested in better understanding the impact of

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elements of the setting within which the individual acts on the individual. The other is concerned

with the appropriateness of rational wealth-maximizing characterization of the decision maker.

Factors Related to the Task Setting

Four elements of the task setting are of particular interest in individual BAR. These areincentives, participation, accountability, and systems interface. The first two are the focus of a

significant portion of BAR; the latter two, much less.

Incentives. Chow 1983 initiated experimental research on the role of incentives in BAR.This line of BAR literature typically uses the principal-agent model to generate hypotheses. For a

survey of the economic models of incentives, see Prendergast 1999. In general, the studies report

that incentives matter and the nature of the incentive system impacts an agent’s behavior e.g.,

Bonner et al. 2000; Towry 2003; Sprinkle et al. 2008.

Participation. Participation is, essentially, concerned with the honesty of communicationwithin the organizational hierarchy. Early BAR investigated how accurately the workers/agents

would communicate their private information. Would they use it to create slack? Generally, the

answer was yes e.g., Young 1985; Shields and Shields 1988.3 However, as discussed subse-

quently, later research recognized the strategic nature of the interaction between the subordinate

and the superior and modeled participation as a negotiation process.

Accountability. Given the function of accounting, it is surprising that the formal develop-ment of accountability was in psychology see Lerner et al. 1998 for a review despite the obvious

link to management accounting research; that is, the effect of evaluation on individual behavior

e.g., Argyris 1952; Prakash and Rappaport 1977. The notion of evaluation in BAR is not limited

to management accounting. When the superior in an audit team examines the work of a subordi-

nate or a client examines the work of a tax professional, an “evaluation” is taking place. The

difference between the evaluation literature and BAR on accountability is reflected in the breadth

of the questions they ask. The evaluation literature focuses on how the accounting system e.g., the

performance indicator affects the extent and direction of the effort provided by the “workers”

Prakash and Rappaport 1977. Accountability BAR not only asks for what the worker feels

accountable, but also asks to whom the “worker” feels accountable when facing conflicting de-

mands e.g., Johnson and Kaplan 1991; Messier and Quilliam 1992, or how elements present inthe accountability setting e.g., a need to justify one’s actions affect the worker’s behavior Ah-

rens 1996.

Miller et al. 2006 recognized that there is an element of mutual accountability in the evalu-

ation process. The superior likely has a prior relationship with the subordinate and in many

instances must “justify” any evaluation he/she makes. Their study focuses on the reviewer in an

audit setting. While the study only examines one party to the dyad, their findings suggest that

factors such as familiarity between the two parties can affect the reviewer’s assessment. There

may be limitations on the ability to perform these experiments with professional participants in

dyads because of the potential impact on the participants’ post-experimental relations.

Systems interface. Information systems in BAR essentially are viewed as decision aids. Theyare discussed under various labels, such as decision support systems DSS and knowledge based

systems KBS. The DSS typically is used in the management information systems literature to

describe an information system intended to support a specific decision and is closest to the termdecision aid DA, which typically is used in auditing to describe what may or may not be a

computerized calculating system. In contrast, the KBS refers to a database collected for a specific

3 Those familiar with the dictator game discussed below will recognize that Young’s 1985 task is essentially the use of a dictator game to simulate participation.




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area of inquiry e.g., XBRL.

The simpler of the two is the DSS. Two broad questions are researched under DSS. How well

are the systems utilized by those for whom they are intended? And, what characteristics of the

DSS facilitate or inhibit their utilization? Specific issues researched under the former include not

only whether the DSS improves decisions, but whether the potential users utilize them andwhether the system can be used to facilitate learning. They differ from the individual choice BAR

studies discussed earlier i.e., that examined how the individual responds to specific outputs of the

system. Those studies typically are linked to cognitive issues and the use of accounting data e.g.,

Lipe and Salterio 2000; Dearman and Shields 2005. The papers discussed in this section are

concerned with the utilization of a DSS as a DA designed to assist an individual perform a specific

task. In general, they report that the DSS is not always utilized e.g., Whitecotton 1996; Eining et

al. 1997.

Whitecotton 1996 found that auditors’ reliance on the DA was inversely related to their

confidence in their own judgment. Obviously, this raises two questions. Is the auditor’s confidence

appropriate? And, how do those using the DA perform relative to the best auditors? Rose and

Wolfe 2000 shed some light on the second question. Using student participants and a tax calcu-

lation task, they report participants who performed the calculation using “pencil and paper” rather

than the DA outperformed the best DA-assisted group by 22 percent, but required 112 percent

more effort Rose and Wolfe 2000, 297; also see Glover et al. 1997; Borthick et al. 2006. It is

important to learn whether the results can be replicated with professionals because it is likely that

their judgment is superior to that of the students.

Arnold et al. 2006 studied the type of data from the KBS used by relative novices senior/

staff auditors and relative experts partner/manager. The two groups differed on several dimen-

sions. Novices chose feedforward explanations, while the experts chose feedback. Arnold et al.

2006 report that the greater the experts’ reliance on feedback explanations from the KBS, the

greater their adherence to the KBS’ recommendation.

There also are interactive systems intended to facilitate access to larger databases. These DSS

are intended to improve the quality of decision making or assist in training. The issues considered

revolve around the usefulness of the database. In BAR, the issue typically can be framed in terms

of the behavioral characteristics of the user and the usefulness to the user of the DSS. The XBRLis an example of such a system. It is intended to enhance the user’s ability to obtain and under-

stand financial data about the firm. Hodge et al. 2004 found that nonprofessional users of

financial statements were better able to ascertain the impact of differing reporting methods for

stock options between firms using the XBRL than without it. However, like Rose and Wolfe

2000, they reported that many of their participants did not utilize XBRL. Other BAR has as its

purpose examining the use of DSS as a tool for training/educating novices.

Alternative modes of communicating information, such as graphs, frequently are used in

reports. For example, nonnumerical formats are regularly used in corporations’ annual reports,

internal reports, and our research. This issue initially was asked by MIS researchers in the 1970s

Dickson et al. 1977 and subsequently extended e.g., Vessey 1994. Despite the extensive use of

pie charts and graphs in internal and external reports, there is little research in BAR on this topicfor an exception, see Amer 2005. In marketing, MacKay and Villarreal 2007 found that the

recipient’s ability to take advantage of the simpler nature of nonnumerical data is likely to varyamong individuals. An interesting example of earlier research in this area, using faces to commu-

nicate financial data, was reported by Moriarity 1979.

Noneconomic Dimensions Affecting the Individual

The above dimensions of the task are essentially elements of the task setting in which the

individual makes a decision. They typically are set by the organization or environment within

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which the decision maker is operating. The decision maker also brings certain characteristics such

as trust and fairness to the setting. These characteristics may be relatively stable for any decision

maker e.g., desire to be treated fairly, or they may vary with the situation e.g., the decision

maker’s mood. In this section, these characteristics as they relate to individual choice are dis-

cussed.Ethics. Closely related to the study of norms is the study of ethical behavior. The former

often is researched in the context of what others expect the actor to do, while ethical behavior

typically refers to the actor’s behavior. Noreen 1988 offers a theoretical link between ethics and

agency theory. He argues that parties to the contract could be expected to follow social norms.

Early BAR on ethics focused on the participants’ moral development e.g., Ponemon 1990. These

studies are concerned with two issues. How developed is the moral reasoning of particular

individuals/groups? And, how does a given level of ethical development affect participants’ on-

the-job behavior? These two questions can easily be adapted for BAR in any of the accounting

sub-areas. The broader issue is how significant the ethical issue is in that sub-area. Auditing

researchers have led the way in considering the role of ethics in BAR. For reviews, see Louwers

et al. 1997 and Jones et al. 2003.

Like the cross-culture research described earlier, the ethics-based research has been charac-

terized by issues over how to measure the level of ethical development/behavior of the partici-

pants. This is not surprising since, like culture, the level of an individual’s ethical development is

not observable as distinct from actions. For a discussion of the different approaches, see Cohen

et al. 1996.

In a post-Enron world, BAR in both auditing and management may find the issue of increased

importance. The problem facing the researcher is likely to be one of access. To minimize the

degree of intrusiveness and obtain responses, this research typically relies on surveys or cases to

elicit responses. There also appears to be a reluctance to publish these papers in the mainstream

accounting journals. A significant number of BAR studies have been published in The Journal of

Business Ethics e.g., Arnold et al. 2007; Emerson et al. 2007.

Two tax-oriented ethics studies suggest possible studies for management accounting behav-

ioral researchers. Fleischman et al. 2007 demonstrate the linkage across the various aspects of

individual-focused research. The paper examines the evaluation by managers in a case concerningthe ethical behavior of a spouse in the context of a tax setting innocent spouse rule. The paper

explores the potential existence of the innocent spouse rule as a norm and the extent to which

research in ethics by behavioral scientists can explain it. Similar studies might be conducted in

management accounting. They could relate the participant’s response to the firing of an innocent

manager and, for example, the participant’s predicted subsequent job behavior. This behavior

relates to the issue of perceived fairness discussed earlier. In the area of financial accounting, Rose

2007 related how what could be labeled unethical reporting by management leads to distrust

on the part of investors.

Cruz et al. 2000 report that tax professionals’ willingness to resist the client’s desire for

aggressive tax reporting is positively correlated with professionals’ score on the Multidimensional

Ethics Scale. This raises the question of how a subordinate might respond to a superior’s efforts

for a more favorable set of budget estimates. Would a measure of ethical development predict the

likelihood of cooperation? In an experiment in financial reporting, Vance et al. 2008 hypoth-esized and found that the better the superior-subordinate relationship, the less likely the subordi-

nate was to resist the superior’s request for aggressive financial reporting.

Two sets of BAR studies have extended early BAR on ethics in interesting ways. They

examine the impact of the individual’s environment on the individual’s ethical behavior. Booth

and Schulz 2004 examine the impact of the organization’s ethical climate on the individual’s

behavior. In a laboratory study, they find that holding the participant’s level of ethical development




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constant, the behavior of the participant moves in the direction of the organization’s ethical

climate. There is no reason to believe that similar results would not be found in the effect of the

permissiveness of audit firms on auditor behavior.

Spicer et al. 2004 and Bailey and Spicer 2007 linked cross-cultural research and ethics.

Earlier studies had reported ethical differences among auditors in different countries e.g., Patel etal. 2003; Arnold et al. 2007. Spicer et al. 2004 and Bailey and Spicer 2007 researched the

ethical norms of a culture on individuals raised in a different culture. In their studies, they studied

U.S. expatriates in Russia involved in the Russian business community. They report convergence

in ethical attitudes and intended behaviors between U.S. expatriate and Russian respondents to

their ethics survey. The U.S. expatriates in their study responded more like their Russian counter-

parts than U.S. nationals in the U.S. The respondents also expressed similar attitudes toward

organizational practices that violated the ethical standards or “hyper-norms.” The U.S. expatriate

respondents who were highly integrated into the Russian community expressed ethical attitudes

similar to those of Russian respondents under conditions of “local Russian norms.” In both cases,

the ethical attitudes of Russians and Americans converge despite the differences that might have

been expected to arise due to their respective national identities.

Mood. Recently, psychologists, experimental economists, and accountants have begun toexamine the role of the decision maker’s emotional state affect on the decision process. These

studies could be important if different mood states affect the decision maker’s perceptions and

decisions. While mood could affect strategic interactions, the research undertaken in BAR thus far

has focused on the individual decision maker.

The rationale underlying studies of this type is that mood affects the nature of the prior

experiences retrieved from memory. Positive mood states lead to retrieving positive outcomes in

comparable situations and vice versa. Wright and Bower 1992, in a BAR-related study, reported

the effect of decision makers’ emotional state happy, neutral, or sad on their perception of the

degree of riskiness of a decision and probability of success. As they conjectured, the subjective

probability estimate is influenced by the decision maker’s mood. “Happy” decision makers give

higher probabilities for the outcome of positive events and lower probabilities for the outcome of

negative events. They report the opposite results for “sad” decision makers.

In an accounting context, Moreno et al. 2002 and Kida et al. 2001 report similar results.Consistent with these results, Chung et al. 2007 studied auditors making inventory valuation

decisions and find that mood state affects the degree of conservatism in the auditor’s inventory

valuation. Auditors in a positive mood are less conservative than those in a negative mood.

Moreno and Bhattacharjee 2008, in a single-party study the other party did not actually exist,

report that knowledge of the other party’s emotional state affects bargaining behavior. For a

discussion of the literature arguing that emotion can enhance the individual’s ability to make

rational choices, see Ackert et al. 2003.

Psychologists and experimental economists have studied other emotional states that could be

of interest to accountants. Lerner and Keltner 2000, 2001 report that fearful participants make

more pessimistic estimates and more risk-averse choices, while anger leads participants to make

more optimistic risk estimates and risk-seeking choices. Interestingly, the responses of angry

participants more closely resembled those of happy participants than those of fearful participants.

For reviews, see Lerner et al. 2004 and Pham 2007.An interesting issue raised by these studies is whether the effect of these emotions is to make

people overly optimistic/pessimistic. We cannot conclude one way or the other without having

some baseline measure of the probability. What should the individuals believe the probability to

be? Since the participants disagree, we can assume that their emotional state has led at least one

of the groups to be incorrect, but that does not preclude the possibility that they both may be in

error. Ideally, further research will be undertaken in this area where there is a known “correct”

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answer. A topic that conceivably could be related to the issue of optimism/pessimism is the effect

of regret in decision making. It has been shown to have an impact in many nonbusiness decision

settings e.g., Gilbert et al. 2004.

A paper by Libby et al. 2008 suggests that optimism/pessimism is not always the “irrational”

result of the decision maker’s emotional state. They report that in some circumstances optimism/ pessimism may be the result of the incentives. If analysts desire good relations with management,

they report that, all else being held constant, the optimism/pessimism of sell-side analysts is a

deliberate act and not based on an emotion or trait.

Two recent studies suggest the possibility of yet another emotion that could be affecting

worker behavior—guilt/guilt aversion. These studies also illustrate how labels potentially can

serve to separate like ideas. Schnedler and Vadovic 2007 hypothesize and find that guilt aversion

motivated participants to exert effort beyond the minimum required by the control system. One

might conjecture that this merely renames the concept embodied in “gift exchange” e.g., Hannan

2005. Staffiero 2006 used guilt to describe the behavior of individual members of Japanese

work groups. The workers felt guilt when they made insufficient contributions to their work group.

In contrast, Birnberg and Snodgrass 1988 offer a more positive explanation of this behavior,

suggesting that the outcomes to other members of the group may have a positive utility to anindividual member. Failure to achieve the group’s goal results in lowered utility because of the

loss to others as well as to oneself.

Fairness. While the perception of fairness has primarily been researched in strategic settings,the perceived fairness of the accounting system affects the behavior of the individual in individual

choice settings as well. Libby 2001 and Hufnagel and Birnberg 1994 found that the participants

were sensitive to the perceived unfairness of the accounting system procedural fairness even

when they were not adversely affected by the rule or system.

Physiological Measures and BAR

Behavioral accounting researchers have tried a variety of methods to understand decision

processes. The methods utilized are relatively non-intrusive, but provide greater insight than

observing an outcome/response in an experimental setting. These approaches include think-aloud

protocols e.g., Bedard and Biggs 1991 and data boards e.g., Shields 1980. These approachesyielded insights into “cognitive flow” or the decision process being followed. However, both of

these methods directly involve the participant and are limited to reporting the decision maker’s

conscious behavior. The methods discussed in this section measure the same behaviors discussed

earlier, but use methods intended to measure physiological changes.

Hunton and McEwen 1997 utilized an eye movement retinal imaging computer to study the

information search strategy of financial analysts. Unlike protocol analysis that relies on self-

reporting and data boards that report only choices, they were able to track the search strategies of

the analysts in a less obtrusive but more detailed manner. They were able to observe data scanned

but not reported protocols or chosen data boards by the participants. Consistent with data board

research, they found that the more accurate analysts used a directed rather than a sequenti al search

strategy. Their search appeared to be motivated by hypotheses generated by the process.4

In finance, Lo and Repin 2002 used more traditional methods electro-dermal and pulse rate

measures to measure the emotional state level of excitement of ten stock traders while they wereactually trading. Lo and Repin 2002 found significant differences between periods when signifi-

cant market events were and were not taking place. They argue this suggests that emotion is a

4 For a discussion of the use of eye movements in marketing research where they have been used more often, see Zaltman1997.




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relevant component of the traders’ decisions. Their data suggest that the response varies with

experience, but the sample is too small to draw any statistically significant conclusions.

Neuroeconomics and Neuroaccounting

Recently researchers studying decision making have taken a new approach. Working withneuroscientists, they have gone one step deeper inside the “black box” that is the decision maker.

Using various devices, they observe the patterns of brain activation as individuals make choices

e.g., McCabe et al. 2001; Camerer et al. 2005; Knudsen et al. 2007. Given the neuroscientists’

knowledge of the function of the brain centers, conclusions can be drawn about what underlies the

observed behavior. By moving one step closer to the decision maker’s cognitive activity, the role

of the stimulus and the response changes in an interesting way. The decision, typically considered

the response in BAR studies, now is the stimulus and the brain center activation is the response.

This is in contrast to traditional research in BAR where researchers observed behavior and inferred

the underlying cognitive processes or extracted them from protocols.

Thus far, little research of this type has been undertaken by behavioral accounting researchers

except for John Dickhaut e.g., Dickhaut et al. 2003; Smith and Dickhaut 2005; Rustichini et al.

2005; Dickhaut 2009. Dickhaut and his colleagues have papers Dickhaut 2009; Dickhaut et al.

2009a, 2009b using neuroscience to study the evolution of recordkeeping i.e., accounting.

However, none of these papers provide the type of systematic review of the possible link between

neuroscience and BAR that can be found for finance in Sapra and Zak 2008, who offer neuro-

science explanations for observed behaviors in financial decision making where data from neuro-

science and neuroeconomics are available.

While potentially quite insightful, there are at least three reasons why research of this type

will progress more slowly than other types of BAR. First, it requires cooperation with a researcher

possessing access to machines to perform the scans and skilled in reading brain scans. Second, it

would appear that research of this type is quite expensive. Third, explaining the findings to other

BAR researchers may be difficult. Moreover, the results may not eliminate the issue of “hard-

wired” versus “learned” behavior as the explanation for the response.

An example of neuroeconomic research’s potential relevance to BAR can be illustrated using

the findings of Luft 1994 and Hannan et al. 2005. Luft 1994 found that participants in herstudy preferred a bonus to a penalty pay scheme even though the payoffs from the two systems

were equivalent. Hannan et al. 2005 found that the participants in the penalty condition exerted

more effort. Given that neuroscientists have shown that different brain centers are used to measure

pleasure reward and pain penalty Delgado et al. 2000, this raises the question of whether the

preference for a bonus scheme reflects differences between the pleasure and pain brain centers

“hardwired” neuroscience explanation or whether it is the approval implied by the “reward” and

disapproval associated with a “penalty” a social psychology issue of intrinsic reward. Barnea et

al. 2009, using Swedish data on twins to study investing behavior, suggest that there is both a

genetic and a learned component.

A series of neuroscience studies may provide some insight into what is happening. Using the

ultimatum game, Tabibnia et al. 2008 report MRIs of the brain that suggest similar results to

those above for fair and unfair behavior. Their design utilized an individual choice study using

only participants who receive the “offer” ultimatum. First, the results suggest that the recipientparticipants differ in what they believe to be a fair offer. Second, those who judge the offer to be

“unfair” show different patterns of brain activity than those who consider the offer to be “fair.”

Finally, participants who accept an unfair offer had different patterns in their MRIs than those who

reject unfair offers Tabibnia et al. 2008.

A study by Harbaugh et al. 2007 that relates brain activity to altruism in decision makers

also illustrates the potential link of neuroscience to BAR. They studied the brain scans of 19

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female students who were asked to make a decision allocating $100 between a food bank and

themselves. The brain scans of the “altruistic” gave more and “selfish” gave less participants

show that the altruistic participants exhibit greater activity in the part of the brain that reflects

pleasure than do the selfish participants. The altruistic participants show significant activity in that

part of the brain even when they were required to contribute a fixed portion of the $100 to thecharity. Studies of this type suggest that there is a physiological basis for the altruistic behavior

that is observed in the real world. It does not explain if the behavior is inherent and hardwired

Hsu et al. 2008 or related to interacting with people and learned Andreoni 1990. The authors

suggest that they believe their results also would apply to male participants had they been included

in the study.

Zak and his colleagues introduced a line of neuroeconomic research that approaches the

“black box” of human cognitive processes in a different way. They argued that the observed

behavior, in this case trust, is based on the brain’s response to a particular hormone. Trusting

participants exhibit higher levels of the relevant hormone than nontrusting i.e., economically

rational participants. This work is summarized in Zak 2008. Kuhnen and Chiao 2009 show

that there also appears to be a genetic basis for the differences in the amount of dopamine and

serotonin. In their study these differences, like those reported by Zak 2008, are associated with

different patterns of behavior.

Summary: Individual Choice Studies

Overall, research focused on the individual’s decision-making behavior has played an impor-

tant role in BAR historically. The predominance of individual-focused research, particularly

among North American and many Australian researchers, is easily observed by examining a recent

issue of BRIA 2007. It contained 13 papers. All of these papers could be classified as focused on

the individual even though they may describe in the scenario the existence of another/other

hypothetical persons or have a scripted confederate role-play the “other person.” Equally impor-

tant is the diversity in topics/areas in which the research is located. Three were related to auditing.

Four dealt with aspects of management accounting. Three were related to financial reporting/

decision making. There was one in tax ethics, one in cross-cultural ethics, and one related to

education. While this admittedly is a convenience sample, the results are similar to Shields 2007.They likely are representative of current BAR in North America. A very different view of BAR in

Europe would result from examining an issues of AOS or other European-based accounting

journals.

This emphasis on individual-focused research is likely to continue to be true of BAR in North

America for several reasons. Many BAR questions focus on the behavior of individuals acting

alone. For example, some of the studies involve one individual’s processing data provided by

another individual or a system e.g., Fedor and Ramsey 2007. Others continue to be concerned

with the cognitive processes of individuals e.g., Joe 2003. Still others involve norms, ethics, and

culture, which typically have been studied by examining the behavior of the individual in isola-

tion. Finally, the individual also may be the easiest approach for researchers.

Individual choice studies do not exist in isolation from the other categories of BAR discussed

in this paper. As the research on strategic choice and group-focused behavior shows, understand-

ing the behavior of individuals often is the basis for hypotheses about behavior in dyads andgroups. Behavior such as honesty Evans et al. 2001; Cohen et al. 2007, that has been exhibited

in studies in which the individual does not actually interact with another participant, can lead to

predictions of behavior in dyads and groups that differ from those of classical economics. This is

particularly true because many of the individually focused studies are studies isolating one mem-

ber of a network of individuals. This is readily apparent in the next section in the discussion of

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There also are limitations in studying the individual in isolation. In part, this results from the

movement in organizations to make groups and teams the decision-making unit. In addition, a

certain amount of the richness found in the decision-making situation may be lost when BAR

isolates the individual from his or her environment.

Strategic Choice Studies

Studies that explicitly consider the participants’ strategic behavior are relatively new in BAR,

though strategic behavior often was implicit and important in earlier BAR. How managers behave

in a participative management setting is an example of a strategic setting. Moving from an

individual choice study where the actor’s behavior is “inward facing” to one where another actor’s

behavior explicitly must be considered introduces the strategic dimension to BAR. In contrast to

the individual choice studies, in the strategic behavior studies the decision maker must consider

the choices made or to be made by an actual rather than a hypothetical fellow participant. For

example, in a management accounting study, the “strategy” to which the participant responds

could be the choice of budget level set by another participant acting as “management.” While an

individual choice study informs us how the manager/agent responds to a given budget level, we do

not learn which budget level the owner/principal would choose to offer to motivate the manager/

agent. In an individual choice study, the researcher may set the independent variable e.g., thebudget at levels different from those a manager actually would choose.

A significant amount of experimental economics research uses experimental dyads see Roth

1995. In BAR, strategic choice studies recognize the limitations in studying the individual in

isolation from the environment and the importance in many settings of the behavior of the “other”

party on the individual. Some argue that it is important actually to have the “other party” exist

whenever the instructions indicate he/she does. Experimental economists argue that it is required

for one of two reasons. The first is “maintaining the integrity of the participant pool.” Experimen-

tal economists often utilize the same pool of participants in different studies. In some studies, the

participant’s experience in a prior study even is a criterion for selection. They argue it is important

the participants believe what they are told. If the post experimental debriefing informs them that

something was not really the case, they may speculate in future studies about the true nature of the

study. The other reason relates to the richness of the experimental setting. Unless the experimenterhas insight into how the other party will behave from prior field or laboratory research, including

the actual behavior of a participant will increase both the potential insights from and the validity

of the study. See Calegari et al. 1998 for an example of this issue.5

Negotiation Studies

The negotiation process is ubiquitous in the business setting. For a review, see Tsay and

Bazerman 2009. Audit firms negotiate with clients over changes in financial statements and

accounting methods McCracken et al. 2010, firms negotiate with suppliers when they establish

operationally intimate relationships JIT, and sub-units within the organization negotiate transfer

prices and/or quantities. While the surface characteristics of the situations are different, many of

the behaviors may be the same e.g., the strategies adopted by the parties. They may differ on

information asymmetry, division of payoffs, and relative power. The degree of information asym-

metry would be expected to affect negotiation, as could the incentives of the parties. For example,

in budgeting negotiations the parties typically are playing a zero-sum game. The slack absorbed by

the worker reduces the manager’s/principal’s profit by a like amount. In other cases, such as the

5 For a discussion of this literature from an auditing perspective but germane to all BAR, see Hooks and Schultz 1996and the symposium in Auditing e.g., Dopuch 1992 and Gibbins 1992. For the contrary view from psychology, seeKelman 1967.

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audit or transfer price settings, the negotiation game being played need not be a zero-sum game.

Rather, a small concession by one party may be significant to the other. Such an asymmetry in

payoffs should affect the negotiation process. Negotiation studies also can be characterized based

on the relative power of the participants: those where the parties have equal power and those

where one party has an advantage.The significance of the strategic interaction is of particular importance for BAR because of

the importance of performance as a “response.” An example of how individual choice literature

and strategic choice settings are related can be found in Fisher et al.’s 2000 study of participation

utilizing interacting dyads. In the framework utilized in this paper, this represents a paradigm shift.

Early BAR into participative budgeting focused on how the “worker” would behave. Would the

workers take advantage of their private information to create slack? Young 1985 even had his

participants meet with a “supervisor” played by the experimenter or a colleague. However, the

“supervisor” did nothing more than accept the worker-participant’s budget. Thus, Young’s 1985

study essentially is an individual choice study. While social pressure was present the design

forced the worker-participant to face a supervisor, it omitted any negotiation over the acceptabil-

ity of the worker’s proposed budget. The explicit power in the situation was vested with the

worker. In reality, the budget-setting process is quite different. In the natural setting, the supervisor

also has significant power. Thus, while Young 1985 reported how the worker would act in

isolation, important aspects of participation are better captured as a dyad that permits strategic

interaction.

A second area of negotiation studies where the use of dyads is present is in the transfer price

literature. Like the participation studies, they are outcome-oriented. In an early study, DeJong et

al. 1989 test the efficacy of various transfer pricing rules. Haka et al. 2000 vary the precision

of the accounting data the manager possesses. The participants receiving the less precise informa-

tion negotiated strategically. They tried to achieve the best price at the risk of failing to reach an

agreement. In contrast, the participants with more precise data used the negotiation process to

communicate information to the other party about his or her position in an attempt to reach a more

informed decision. Chalos and Haka 1990 and Ghosh 2000 also studied the negotiation process

in the transfer price setting in laboratory experiments. Ghosh 2000 observed that when the

incentive system is consistent with the sourcing of the input, the systems are perceived as fairerand the participants behaved in a less exploitive manner. Also see Luft and Libby 1997.

How humans negotiate and what motivates them to behave in a particular way is a question

of interest to all BAR. Findings in one area have implications for the others. Calegari et al. 1998

report two interesting results concerning dyads using an auditing-based task. One relates to the

outcome of the negotiation process, the other to method. In their study, M.B.A. students, partici-

pating in the experiments as “auditors” and “clients,” exhibited two types of behavior: competitive

pairs and cooperative pairs. The competitive pairs behave as Calegari et al.’s 1998 economic-

based hypotheses predict. However, the cooperative pairs exhibit what Calegari et al. 1998

describe as signaling and cooperative behavior. What causes the pairs to behave differently is an

unanswered question that should interest BAR.

Calegari et al. 1998 also reported an interesting methodological result. The outcomes from

a human-computer dyad were different from those of the human-human pairs. Obviously, the

computer was not programmed to respond to cues/signals, such as willingness to cooperate, thatthe human partner might send. This reinforces the concern about the limits in utilizing the indi-

vidual choice style of research when the “other party” has an opportunity to act/interact strategi-

cally. This is especially true where the set of actions includes choices that could facilitate reaching

a noncompetitive, but mutually beneficial, conclusion.

There are, however, settings when studying dyads in a laboratory may not be practical or even

feasible. This would be especially true in cases such as Calegari et al. 1998, where students may




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not be suitable surrogates for professionals. This raises the issue of external validity. Researchers

have tried to resolve this problem in an audit setting by studying the negotiation process using

professionals as participants in individual choice studies that “simulate” interacting dyads. For

example, Favere-Marchesi 2006 studied the initial negotiation postures of auditors and clients

over a proposed change in the financials, giving the same case study separately to each type of participant. They conclude that ex ante the clients have a better understanding of the auditors’

initial position than the auditors do of the clients’. In a related study, Tan and Trotman 2007

proposed and tested a model of when in the negotiation process auditors should make concessions

to clients. Their experiment uses financial officers as clients and a computer simulation as the

auditor who negotiates with the client via email. They report the clients’ responses and the

clients’ strategies in responding to the simulated auditor. However, their findings should be viewed

in light of Calegari et al. 1998. How this initial difference and differing strategies would play out

during negotiations between financial officers and actual auditors remains an open question.

Because of the potential problems involved in using actual auditors and their clients, it is unlikely

to be studied in an experimental setting using professionals as participants in both roles. We may

need to rely on archival research to understand the behavior of these dyads e.g., Nelson et al.

2002.

Settings with explicitly unequal power. Other papers have utilized dyads in negotiation/ bargaining studies where the parties possess unequal power. These studies usually investigate the

presence or absence of the norm of fairness in economic man rather than negotiation in a specific

setting. They typically utilize either the ultimatum or the dictator game Roth 1995. In the dictator

game, one person the dictator is given an endowment to allocate between self and another party

the recipient. The recipient must accept the dictator’s allocation. These studies utilize actual

rather than simulated recipients. Because the recipient is passive in the experimental setting, the

use of a dyad would appear to be intended to meet the criterion of not misleading the participants.6

In contrast, in the ultimatum game, the first party’s the “proposer” situation is identical to that of

the dictator except that the recipient now may accept or reject the proposer’s offer. If accepted, the

proposer’s offer determines each party’s payoff. However, if rejected, both parties receive nothing.

The results of studies using both games tend to support a norm of fair treatment expected by

the responders and recognized by the dictator/proposer Roth et al. 1991; Berg et al. 1995. In boththe dictator and ultimatum games, the first party makes an offer approaching, on average, 40

percent of the endowment Roth 1995. This result appears to reflect the recognition by many of

the participants of a norm that sets the “fair” allocation of the endowment.

Cheap talk research in dyads. The typical “cheap talk” study also reflects a setting wherethe strategic interaction is germane to the study e.g., Kachelmeier et al. 1994; Rankin et al. 2003.

How will the party receiving the nonbinding message react to it? Obviously, such a study could be

done using the individual receiving the message as the focus. However, such a study would lose

the behavior of the participant who is allowed to make the cheap talk commitment. That individu-

al’s behavior also is of interest to the researcher. Thus, it is preferable for the study to use a dyad

potential sender and receiver rather than only a receiver. In general, research has found that the

cheap talk often is viewed by the recipient as if it is a binding commitment e.g., Kachelmeier et

al. 1994; Zhang 2008. Cheap talk studies can be conducted in any setting in accounting where the

context permits one party to communicate with and make a nonbinding pre-commitment to an-other party that, if true, should affect the other party’s behavior.

6 There are, of course, designs where the recipient-participant could be needed later for another experiment. For example,the recipient-participant in the early rounds could, in the later rounds or in another experiment, play the role of thedictator. The researcher could study the interaction between the amount offered to a participant and the amount subse-quently offered by that participant when acting as the dictator.

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Effect of non-negotiating third party. The work of Fehr and Gaechter 2000 and Zhang2008 provide insight into why it is beneficial for the researcher to include all the potential parties

in a study. Fehr and Gaechter 2000 report that a third party, who only observes unfair behavior,

is willing to incur a cost to punish the unfair participant. Zhang 2008, in a BAR study, provides

an interesting twist on the strategic interaction present in dyads. The dyad about which shehypothesizes consists of two managers agents who report to the same owner principal. She

examined the truthfulness and whistle-blowing behavior of two agents. Each agent’s cost is com-

mon knowledge to the two agents, but asymmetrical information to the principal. Essentially, her

findings show that the strategic behavior of the members of the dyad the agents depends on the

endogenous behavior fairness of the third party the principal. The actual presence of the third

party in the study had two benefits. First, it enhances the internal validity of the study. Second, it

ensures that the principal’s behavior in the experiment actually reflects how the principal would

act. In this case, the principal offers a lower wage because of concerns over being cheated by the

agents. This insight, in turn, can serve as a basis for future BAR on the principal’s behavior in this

setting.

Reputation. We all utilize information on another’s past behavior i.e., reputation in makingchoices. Similarly, managers must rely on the reputation of other managers in making investment

decisions, and investors, analysts, and auditors rely on managers’ reputations in their interactions

with firms. However, there is limited research on the role of reputation in the willingness of one

party to trust another.7

This reflects the design of experiments. Most studies, such as those de-

scribed in the previous sections, use a “turnpike” approach. The participants are anonymously

paired and typically do not “play” the same participant more than once. This is intended to

eliminate reputation as a factor in decision making and as a potential confound. Thus, the question

of the reputation of individual players must be set aside.

But what is known is that when players interact over time, expectations and reputations are

formed and, moreover, the quality of decision making may improve relative to the turnpike design

Schwartz and Young 2002. Duffy et al. 2009 provide further insight into reputations. Partici-

pants may not always recognize the value of acquiring information about the other participant’s

behavior, a form of reputation. They reported that participants who initially received costless

feedback about the behavior of others utilized the feedback/reputation-related information. How-ever, those participants who did not receive feedback information until later in the experiment did

not utilize the information to the same degree. In addition, they report that when a nominal cost is

attached to the feedback, participants did not buy the information even though it was quite

profitable to do so.

Note that in the studies discussed above, reputation is very stylized: it takes the form of very

specific information. This encapsulates the idea of reputation in the laboratory. However, in the

“real world,” the information that goes into forming a reputation may be subjective and imprecise.

Given the role that reputation can play in business settings, there is room for additional research

in this area.

Summary: Strategic Choice Studies

The study of dyads is at the intersection of individual and group BAR. It offers valuable

insights into the individual’s strategic behavior and is important for three reasons. One is thatstrategic behavior is integral to many business activities. A second is that participants act differ-

ently when the other party is present rather than hypothetical e.g., Calegari et al. 1998. Finally,

7 Archival markets research has concerned itself with audit firm reputation, particularly in the wake of Arthur Andersene.g., Barton 2005. There has been very limited BAR in this area Mayhew 2001, Mayhew et al. 2001. BAR hasoperationalized the audit firm as an individual in experimental markets studies.




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and perhaps most importantly, the use of dyads permits the researcher to study both sides of the

strategic interaction and do so over a series of iterations between members of the dyad. The dyad

may be composed of peers as in Zhang 2008 and Towry 2003, or be hierarchical as in the

studies of budget negotiation Fisher et al. 2000 and the dictator and ultimatum games.

BAR research undertaken thus far suggests that the presence of a “real person” with whom theparticipant interacts affects their behavior Calegari et al. 1998. BAR using dyads could be useful

in developing a better understanding of how managers and workers, as well as auditors and tax

professionals/payers, behave in various settings, in addition to insights into the negation process.

It also could reveal how “soft behavioral constraints” such as norms can affect behavior.

The nature of the interaction can vary, as can the mechanism used to achieve it. As even the

ultimatum game shows, both parties possess some power i.e., the ability to affect the behavior of

the other, albeit in some cases a very “soft” power. The study of how they use this power and how

the parties interact their strategies is what makes the study of dyads interesting. It is important to

note that the results discussed above and elsewhere often run counter to the simplistic notion of the

self-interested, wealth-maximizing “economic person.”

Because dyads can be viewed as a subset of group behavior, studying dyads yields potentially

valuable insights into group behavior. However, there are obvious limitations. The greater level of complexity facing the individual members of a group increases with the number of members

interacting. Thus, many of the laboratory studies reported below under group-focused BAR limit

the strategic choices available to the interacting parties. As useful as data gleaned from the study

of dyads may be, to better understand the group phenomenon in question researchers have turned

to alternative research methods relying on naturally occurring events fieldwork, archival data,

surveys, and interviews.

The ability to undertake research on dyads and observe the strategic interaction of the parties

may not be as easy as the BAR focusing on the individual. Dyad research at least doubles the

number of participants required with a comparable increase in the cost of the experiment. It also

can require a high degree of coordination. The participants must be available at the same time and,

typically, in the same place. This suggests that research of this type is likely to take place in a

laboratory or through fieldwork. The former is likely to mean student participants; the latter,

professionals performing their job in their natural environment. This would appear to limit the

amount of work of this sort that will be undertaken using nonstudent participants.

GROUPS

The label “group” in this context is used to include a variety of organizational structures.

Group is defined as any collection of individuals greater than two and typically no more than four

in laboratory studies. Rarely is it more than five members. This definition is admittedly arbitrary,

but consistent with the literature in the area. The above definition does not specify a particular

organizational structures for a group. Thus, group as defined for this section includes not only

peer groups, but also teams and hierarchical groups.

Psychology research on group decision making initially focused on the quality and nature of

the individual versus group decisions. Which makes the better decision? Which makes the riskier

decisions? For a review, see Sutton and Hayne 1997 and Daroca 1984. Sociology was inter-ested in the development of networks e.g., Homans 1951 and the affect of context variables on

group behavior e.g., Dalton 1959. For a review of sociology based studies, see Miller 2007.

More recent studies have focused on the nature of the group processes. How does the composition

of the group e.g., temporary or permanent affect its decision? What is the effect of changes in

group membership? How does the decision rule used by/imposed on the group affect their deci-

sion?

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BAR on groups has addressed five broad categories: 1 individual versus group performance,

2 group decision processes, 3 the role of technical and accounting systems in group decisions,

4 the role of incentives, and 5 the role of a group’s characteristics in its performance. Many

studies have asked questions that relate to more than one of the a

Documents

Behavioral Accounting Research Framework