Empirical analysis of the major factors affecting appropriateness of confidence in predicting financially distressed firms

by Siu-yeung Chan.Publication date from spine.Thesis (Ph.D.)--Chinese University of Hong Kong, 1995.Includes bibliographical references (leaves 254-278).Chapter CHAPTER I --- INTRODUCTION --- p.1Chapter 1.1 --- Background of the Study --- p.1Chapter 1.2 --- Research Problems and Objectives --- p.5Chapter 1.3 --- Justification for the Study --- p.7Chapter 1.4 --- Research Model and Hypotheses --- p.9Chapter 1.4.1 --- Research Model --- p.9Chapter 1.4.2 --- Research Hypotheses --- p.10Chapter 1.5 --- Research Methodology --- p.12Chapter 1.6 --- Definitions of Key Terms --- p.14Chapter 1.7 --- Scope of the Study --- p.16Chapter 1.8 --- Organisation of the Thesis --- p.17Chapter CHAPTER II --- LITERATURE REVIEW ON BEHAVIOURAL DECISION THEORY --- p.19Chapter 2.1 --- Introduction --- p.19Chapter 2.2 --- Behavioural Decision Theory: Historical Development --- p.20Chapter 2.3 --- Bounded Rationality --- p.22Chapter 2.4 --- Lens Model --- p.25Chapter 2.5 --- Heuristics and Biases --- p.27Chapter 2.5.1 --- Overview --- p.27Chapter 2.5.2 --- Availability Heuristic --- p.28Chapter 2.5.3 --- Anchoring and Adjustment Heuristic --- p.29Chapter 2.5.4 --- Representativeness Heuristic --- p.31Chapter 2.5.5 --- Conjunction Fallacy --- p.32Chapter 2.5.6 --- Hindsight Bias --- p.34Chapter 2.5.7 --- Order Effects in Brief Updating --- p.35Chapter 2.5.7.1 --- Evidence Encoding --- p.36Chapter 2.5.7.2 --- Response Mode --- p.37Chapter 2.5.7.3 --- Adjustment Weighting --- p.38Chapter 2.5.7.4 --- Order Effects --- p.39Chapter 2.5.8 --- Framing Effect --- p.40Chapter 2.5.9 --- Sunk Cost Effect --- p.42Chapter 2.5.10 --- Confirmation Bias --- p.44Chapter 2.5.11 --- Accountability --- p.47Chapter 2.5.12 --- Base-Rate Fallacy --- p.49Chapter 2.5.12.1 --- Reduction of the Base-Rate Fallacy --- p.51Chapter 2.5.12.1.1 --- The Relevance of Base-Rate Information --- p.51Chapter 2.5.12.1.2 --- The Relevance of Case-Specific Evidence --- p.53Chapter 2.5.12.2 --- Effects of Need for Cognition on the Base-Rate Fallacy --- p.54Chapter 2.5.13 --- Overconfidence Effect --- p.56Chapter 2.5.13.1 --- Calibration and Calibration Curve --- p.58Chapter 2.5.13.2 --- Factors Affecting Appropriateness of Confidence --- p.60Chapter 2.5.13.2.1 --- Task Factors --- p.60Chapter 2.5.13.2.2 --- Environmental Factors --- p.61Chapter 2.5.13.2.3 --- Individual Difference Factors --- p.63Chapter 2.5.13.3 --- Methods Promoting Appropriate Confidence --- p.64Chapter 2.5.13.4 --- Appropriateness of Experts' Confidence --- p.67Chapter 2.5.13.5 --- Conceptual and Methodological Issues --- p.68Chapter 2.6 --- Contingent Decision Behaviour --- p.72Chapter 2.6.1 --- Overview --- p.72Chapter 2.6.2 --- Factors Influencing Contingent Decision Behaviour --- p.73Chapter 2.6.3 --- Effects of Task Variables on Selecting Decision Strategies --- p.74Chapter 2.6.3.1 --- Task Complexity --- p.74Chapter 2.6.3.2 --- Response Mode --- p.77Chapter 2.6.3.3 --- Information Display Mode --- p.77Chapter 2.6.3.4 --- Agenda Effect --- p.78Chapter 2.6.4 --- Effects of Context Variables on Selecting Decision Strategies --- p.78Chapter 2.6.5 --- Effects of Effort and Accuracy on Selecting Decision Strategies --- p.79Chapter 2.7 --- Integrated Framework for Behavioural Decision Theory --- p.81Chapter 2.7.1 --- Principle of Bounded Rationality and the Three Research Frameworks --- p.82Chapter 2.7.2 --- Lens Model and Heuristics-and-Biases Frameworks --- p.83Chapter 2.7.3 --- Lens Model and Contingent Decision Behaviour Frameworks --- p.84Chapter 2.7.4 --- Heuristics-and-Biases and Contingent Decision Behaviour Frameworks --- p.85Chapter 2.8 --- Chapter Summary --- p.85Chapter CHAPTER III --- LITERATURE REVIEW ON BEHAVIOURAL DECISION RESEARCH IN ACCOUNTING --- p.88Chapter 3.1 --- Introduction --- p.88Chapter 3.2 --- Overview of BDR in Accounting and the Major Determinants of Decision-Making Performance --- p.89Chapter 3.3 --- Heuristics and Biases --- p.93Chapter 3.3.1 --- Overview --- p.93Chapter 3.3.2 --- Availability Heuristic --- p.94Chapter 3.3.3 --- Anchoring and Adjustment Heuristic --- p.96Chapter 3.3.4 --- Order Effects in Belief Updating --- p.99Chapter 3.3.4.1 --- Overview --- p.99Chapter 3.3.4.2 --- Model Predictions --- p.100Chapter 3.3.4.3 --- Order Effects On Effectiveness --- p.102Chapter 3.3.4.4 --- Factors Affecting the Order Effects --- p.103Chapter 3.3.4.5 --- Summary of Accounting Research on the Order Effects in Belief Updating --- p.105Chapter 3.3.5 --- Conjunction Fallacy --- p.106Chapter 3.3.6 --- Framing Effect --- p.107Chapter 3.3.7 --- Confirmation Bias --- p.110Chapter 3.3.8 --- Hindsight Bias --- p.113Chapter 3.3.9 --- Accountability --- p.116Chapter 3.3.10 --- Base-Rate Fallacy --- p.118Chapter 3.3.10.1 --- Overview --- p.118Chapter 3.3.10.2 --- Attention to Base Rates --- p.119Chapter 3.3.10.3 --- Attention to Source Reliability --- p.123Chapter 3.3.10.4 --- Insensitivity to Sample Size --- p.127Chapter 3.3.10.5 --- Summary for Accounting Research on the Base-Rate Fallacy --- p.129Chapter 3.3.11 --- Overconfidence Effect --- p.129Chapter 3.3.11.1 --- Appropriateness of Auditors' Confidence --- p.130Chapter 3.3.11.2 --- Factors Affecting the Appropriateness of Auditors' Confidence --- p.131Chapter 3.4 --- Behavioural Decision Research in Financial Distress Prediction --- p.136Chapter 3.4.1 --- Overview --- p.136Chapter 3.4.2 --- Prediction Performance --- p.137Chapter 3.4.2.1 --- Prediction Accuracy --- p.137Chapter 3.4.2.2 --- Appropriateness of Confidence --- p.138Chapter 3.4.3 --- Factors Affecting Prediction Performance --- p.139Chapter 3.4.3.1 --- Overview --- p.139Chapter 3.4.3.2 --- Information Load --- p.139Chapter 3.4.3.3 --- Information Cue Choice Versus Weighing of Cues --- p.140Chapter 3.4.3.4 --- Base-Rate Information --- p.141Chapter 3.4.3.5 --- Task Predictability --- p.144Chapter 3.4.3.6 --- Reward Structure --- p.145Chapter 3.4.3.7 --- Individual Differences --- p.145Chapter 3.4.4 --- Group Judgment Accuracy --- p.146Chapter 3.4.5 --- Section Summary --- p.147Chapter 3.5 --- Motivation for the Current Study --- p.149Chapter 3.5.1 --- Research Opportunity 1 --- p.149Chapter 3.5.2 --- Research Opportunity 2 --- p.150Chapter 3.5.3 --- Research Opportunity 3 --- p.152Chapter 3.5.4 --- Research Opportunity 4 --- p.153Chapter 3.6 --- Chapter Summary --- p.154Chapter CHAPTER IV --- RESEARCH MODEL AND HYPOTHESES --- p.156Chapter 4.1 --- Introduction --- p.156Chapter 4.2 --- Research Model --- p.156Chapter 4.3 --- Research Hypotheses --- p.158Chapter 4.3.1 --- Hypothesis 1 --- p.158Chapter 4.3.2 --- Hypothesis 2 --- p.160Chapter 4.3.3 --- Hypothesis 3 --- p.163Chapter 4.3.4 --- Hypothesis 4 --- p.166Chapter 4.3.5 --- Hypothesis 5 --- p.168Chapter 4.4 --- Chapter Summary --- p.172Chapter CHAPTER V --- RESEARCH METHOD AND DESIGN --- p.173Chapter 5.1 --- Introduction --- p.173Chapter 5.2 --- Research Method --- p.173Chapter 5.3 --- Experimental Design --- p.175Chapter 5.4 --- Subjects --- p.177Chapter 5.5 --- Construction of the Experiment Instrument --- p.179Chapter 5.5.1 --- Selection of Sample Firms for Prediction Tasks --- p.180Chapter 5.5.1.1 --- Definition of Firms being in Financial Distress --- p.180Chapter 5.5.1.2 --- Identification of Firms in Financial Distress --- p.182Chapter 5.5.1.3 --- Selection of Healthy Firms --- p.182Chapter 5.5.1.4 --- Sample Firms in the Instrument --- p.183Chapter 5.5.2 --- Selection of Financial Ratios --- p.184Chapter 5.5.2.1 --- Logit Analysis --- p.185Chapter 5.5.2.2 --- Pilot Interviews --- p.187Chapter 5.5.2.3 --- Final Financial Ratios Used in the Instrument --- p.188Chapter 5.5.3 --- Modification of the Need for Cognition Scale --- p.189Chapter 5.5.4 --- Translation of the Experiment Instrument --- p.191Chapter 5.5.5 --- Pretest of the Experiment Instrument --- p.191Chapter 5.6 --- Administration of Experiment --- p.192Chapter 5.7 --- Operationalisation and Measurement of Variables --- p.193Chapter 5.7.1 --- Relevance of Base-Rate Information --- p.193Chapter 5.7.2 --- Need For Cognition --- p.195Chapter 5.7.3 --- Perceived Informativeness of Case-Specific Evidence --- p.197Chapter 5.7.4 --- Appropriateness of Confidence --- p.199Chapter 5.8 --- Data Analysis Methods --- p.201Chapter 5.9 --- Chapter Summary --- p.203Chapter CHAPTER VI --- ANALYSIS OF DATA --- p.205Chapter 6.1 --- Introduction --- p.205Chapter 6.2 --- Descriptive Data about the Subjects --- p.205Chapter 6.3 --- Stepwise Logit Analysis --- p.207Chapter 6.4 --- Statistical Testing for Hypotheses --- p.210Chapter 6.4.1 --- Testing Hypothesis 1 --- p.211Chapter 6.4.2 --- Unbalanced ANOVA Model --- p.212Chapter 6.4.3 --- Testing the Base Rate Pre-occupied by the Subjects --- p.215Chapter 6.4.4 --- Testing Hypothesis 2 --- p.217Chapter 6.4.5 --- Testing Hypothesis 3 --- p.218Chapter 6.4.6 --- Testing Hypothesis 4 --- p.220Chapter 6.4.7 --- Testing Hypothesis 5 --- p.222Chapter 6.5 --- Supplementary Statistical Testing of Hypotheses --- p.224Chapter 6.5.1 --- Separate Models for Hypotheses 2 to 5 --- p.224Chapter 6.5.2 --- Effects of Other Interactions --- p.224Chapter 6.5.3 --- Analysing NC As a Continuous Variable --- p.225Chapter 6.5.4 --- Repeated Measures ANOVA --- p.226Chapter 6.5.5 --- Additional Analysis ´ؤ Controlling for Task Predictability --- p.228Chapter 6.6 --- Chapter Summary --- p.232Chapter CHAPTER VII --- "SUMMARY, DISCUSSIONS AND IMPLICATIONS" --- p.234Chapter 7.1 --- Recap of the Study --- p.234Chapter 7.2 --- Conclusions and Discussions --- p.237Chapter 7.2.1 --- Hypothesis 1 --- p.237Chapter 7.2.2 --- Hypothesis 2 --- p.239Chapter 7.2.3 --- Hypothesis 3 --- p.241Chapter 7.2.4 --- Hypothesis 4 --- p.243Chapter 7.2.5 --- Hypothesis 5 --- p.244Chapter 7.2.6 --- Overall Conclusions --- p.246Chapter 7.3 --- Implications for Theory --- p.246Chapter 7.4 --- Implications for Practice --- p.248Chapter 7.5 --- Limitations of the Study --- p.249Chapter 7.6 --- Recommendations for Further Research --- p.252REFERENCES --- p.254APPENDIX A: EXPERIMENT INSTRUMENT (IN ENGLISH) --- p.279APPENDIX B: EXPERIMENT INSTRUMENT (IN CHINESE) --- p.306APPENDIX C: STEPWISE LOGIT ANALYSIS RESULTS --- p.33