THE IMPACTS OF OFF BALANCE SHEET TYPES AND INVESTMENT POSITIONS ON INVESTORS' JUDGMENTS

Abstract

This study investigated the impact of off-balance sheet (OBS) types and investment positions on investors’ perceived credibility of financial statements and their ability to detect and correct the OBS financing arrangements. Through an experimental approach, given the investors’ knowledge of creative accounting, the research provide evidence that the directional preferences influence the investors’ perceived credibility of the financial statements and also their detection ability of off-balance sheet financing. Specifically, long investors were biased from their directional goal for the firm’s positive performance as compared to neutral investor, i.e. prospective investor. However, no significant difference was found between the short and long investors’ judgements. Further, it was found that off-balance sheet types significantly influenced the investors’ ability to detect and correct the off-balance sheet financing transactions. Given their knowledge of creative accounting, the investors facing with equity method were less likely to detect OBS and possessed a lower ability to make analytical adjustments than those facing with operating lease. The implication of the findings is for the relevant regulatory bodies to revisit the disclosure format related to complex OBS so as to reduce the complexity burden borne by the investors. Moreover, this research is expected to raise investors’ awareness on the usefulness of disclosure information in the footnote section.