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Faculty Findings

Taking the hint:

How a few words can bias accountants’ expert testimony

If you’re a cynic with regard to the objectivity of our judicial system, take note: new research shows how the outcome of auditor-liability cases can be swayed by just a few quick comments.

In a study of accountant expert witnesses and trial judges published this year in The Accounting Review, Professor Dave Ricchiute established a link between attorneys’ hints, expert testimony, and settlement verdicts. Ricchiute’s first experiment, conducted with partners and managers of a Big Five accounting firm, demonstrated that an accountant’s prior knowledge of an attorney’s line of reasoning often swayed his expert testimony. A corollary study then found that trial judges’ decisions leaned in the direction of the experts’ reports.

Despite expressing confidence that accountant experts “come to the task objectively,” Ricchiute explains that his research uncovers “the likelihood for unintentional bias.” Conflicted testimony violates the Federal Rules of Evidence. And because litigation services have become a significant market niche among practicing accountants, Ricchiute’s study suggests implications for further research, practice, and education of accountants and attorneys.

—Becky Wiese

The Thorny Knot of Workplace Envy

Dryden called envy “the jaundice of the soul,” while for John Churton Collins it was “the sincerest form of flattery.” So what do we make of envy in the workplace?

Management Professor Bob Vecchio found the naturally competitive atmosphere of the workplace to be fertile ground for such begrudging behavior. His study, published in Cognition and Emotion, is the first to examine both sides of the workplace envy equation: envying and being envied by one’s co-workers.

Vecchio concludes that being envied and feeling envious create distinctly different outcomes. While being the target of envy does not correlate with factors such as gender, age, education, self-esteem or job satisfaction, it does correlate with greater job longevity. By contrast, employees who report feeling envious toward others also report lower job satisfaction, lower self-esteem, and lower quality working relationships with supervisors.

His findings also reveal a joint influence of employee Machiavellianism (use of political behavior to seek social advantage) and the quality of the working relationship with one’s supervisor, such that an employee who is both highly Machiavellian and enjoys a high quality working relationship with the supervisor is also more likely to be the target of co-worker resentment.

—Becky Wiese

Behavioral Finance: Oxymoron?

What if investors do not behave rationally according to longstanding market theory? What if their pervasive psychological biases influence the market as a whole—and markets don’t really reflect a correct price?

These questions are at the foundation of behavioral finance, a controversial new area of study. Last October, the Mendoza College of Business Finance Department sponsored a conference with leading researchers in the field from Princeton University, Northwestern University, and the University of Amsterdam, among others.

Some of their findings were provocative:

• Because individuals prefer to invest in local businesses, companies will have higher stock prices if they are located in areas with fewer companies and more dollars to be invested. Research shows this bias alone should increase a small company’s stock price by 14%.

• Individual investors tend to trade too much and think they are better at picking stocks than they actually are. Men, in particular, are subject to what radio host Garrison Keillor might dub the “Lake Wobegon Syndrome.” Men trade more than women do, pay more in transaction costs, and are shown to have poorer investment returns.

While research in behavioral finance is moving into the mainstream, major questions remain about its application to the study of markets. Traditional finance theory holds that the actions of individual investors tend to be random and to balance each other out, so that the markets do reflect an accurate price. Behavioral finance scholars are wondering, what if they don’t?

—Mary Hamann

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