Document Type : Research Paper
Authors
Abstract
Valuation theories and models have evolved over time from the very simple present value formulation to more complex relationships. But the causality between accounting numbers and the value of the firm has not been succinctly developed investors, investment advisors, and analysts continue to utilize accounting numbers as a subset of the information used in forming expectations about the probability distribution of rates of return.
Finally, to the extent that investment analysts and advisors try to beat the market, their Utilization Of information in making expectations can be colored by their personal, individualistic attributes. One of these attributes is the phenomenon of functional fixation.
In psychology, functional fixation refers to a phenomenon of most human behavior: "the individual attaches a meaning to a title or an object and is unable to see alternative meanings or uses.
In applying this concept to accounting, they extrapolated that: "if the outputs from different accounting methods are called by the same name, such as profit, cost, etc..., people who do not understand accounting well, tent to neglect the fact that alternative methods may have been used to prepare the outputs. In such a case, a change in the accounting process clearly influences the decisions.
"Functional fixation hypothesis in accounting, that is, investors have a value from securities in mind which is obtained from some certain accounting figures, such as earning per share, without paying attention to how it is calculated, or what is its information content. On the other hand, investors have functional fixation on accounting figures, not on its information content.
The operational testing of the central hypothesis is achieved by testing a series of sub-hypotheses which are tailored to fit the type of data generated by the experiment.
All of the given tests pointed up this matter that, respondents in the sample (the statistical sample was chosen from received and valid answers of 38 answer sheets) have classified the firm which has changed the method of the weighted average (its reported profit is decreased and its cash inflow is increased), much lower than its similar firm which has continued Fifo method.
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