Koonce Tests Complex Interplay Between
Accounting and Investor Perceptions

If you haven’t heard of behavioral accounting research, you are not alone. A relatively new field, it is defined as the study of the underlying psychology behind how investors view financial reports.

Professor Lisa Koonce is one of the leaders in behavioral accounting, and she has been designing experiments that seek to better understand the complex relationship between accounting practices and investor perceptions.

Recently, Koonce examined the sometimes controversial use of derivatives by companies looking to manage interest-rate risk associated with their liabilities.

Koonce said that many managers in the past have cited a concern over potential negative investor perception as an important determinant in their decisions not to use derivatives. This concern appears rational as investors do consider firms that use derivatives to be riskier than those who do not use them.

Because the outcomes from the use of derivatives are now widely reported in public financial statements, Koonce said it was important to understand how investors think about derivative use in light of the outcomes.

In her paper, “Investor Reactions to Derivative Use and Outcomes,” Koonce and her colleagues reported the results of three experiments designed to identify how investors react to derivative use after the outcomes are known.

“We’ve found that a manager’s concern that investors always view derivative use negatively is unfounded,” Koonce said. “The results show that, holding constant the economic outcome, investors are more satisfied when the company uses a derivative. In fact, we found that investors reward companies for using derivatives by boosting their evaluation of management.”

Intriguingly, the researchers found that the positive reaction to derivative use occurs even when the economic outcome from the derivative is poor.

“Our research shows that investors will still reward managers even when the company is worse off from having used the derivative contract,” Koonce said. “Investors give more credit to firm managers who use derivatives as compared to managers who do not, even when the underlying economics are identical. Investors infer decision-making care on the part of managers who use derivatives to address risk exposures.”

The study has important practical implications, Koonce said. “Specifically, we provide assurance to firm managers who want to increase derivative use to address exposures and are faced with the subsequent reporting of the actual outcomes in the financial statements,” she said. “Although one could argue that it should not matter how a company achieves a particular outcome as long as the economics are identical among the alternative paths, our results suggest that the path to an outcome does matter to investors and that managers who use derivatives are given more credit than those who do not.” 

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