A common finding of many surveys of corporate financial management practice is that the actual usage of normative financial models is infrequent. This is mainly due to the complexity of the decision environment, the use of information processing heuristics by decision makers, and the presence of psychological factors that influence the decision maker's behaviour. This paper reviews certain psychological concepts and their effects on the validity of traditional fundamental analysis in finance. Second, it discusses how cognitive limitations of human information processing may interfere with the implementation of certain decision rules in financial management, especially when decision makers experience information overload. Third, it provides a review of the advances that have been suggested to overcome the cognitive limitations of human information processing and to evaluate whether such advances can circumvent the psychological biases inherent in human decision makers.

The objective of this research is to assess whether the incremental information content of current cost (CC) income and constant dollar (CD) income is time-period specific. Based on work by Lim and Sunder (1990), we predict that CC (CD) income is more likely to exhibit incremental information content over CD (CC) income when the dispersion in annual price changes across industries is large (small). Evidence provided using FASB Statement No. 33 data is consistent with these predictions. That is, CD (CC) income is shown to exhibit incremental information content over CC (CD) income in the years 1980 and 1983 (1981 and 1982). We then extend this analysis to a disclosure environment that includes historical cost (HC) income, and find that CD (CC) income also has incremental information content over HC income in those same years—1980 and 1983 (1981 and 1982). Thus, by identifying time periods when either CC income or CD income is the preferred income measure, we also are able to provide sample-wide evidence that accounting data adjusted for changing prices of productive assets provide incremental information over HC income.

No abstract

No abstract

No abstract