Profits versus Losses: Does Reporting an Accounting Loss Act as a Heuristic Trigger to Exercise the Abandonment Option and Divest Employees?
M PINNUCK, A LILLIS
Accounting Review | American Accounting Association | Published : 2007
The binary classification of firms into profits or losses represents a powerful heuristic. The literature that has examined the impact on the firm of this earnings heuristic has focused on the earnings management actions of small profit firms. The impact of this earnings heuristic on the actions of firms reporting accounting losses and the decision-making effects the heuristic may have other than earnings management have not been examined. In this study we hypothesize that reporting an accounting loss acts as a heuristic trigger for firms to exercise the abandonment option and discard unproductive investments. The results are consistent with the hypothesis. We find that there is a sharp and ..View full abstract