The Effects of the CEO’s Perceptual Bias in Economic Decision- Making and Judgment on the Capabilities of the Financial Reporting Quality

The financial anomalies, which have brought about challenges for the nature of efficient-market hypothesis, provide ample experimental evidence on the deviation of market from rationality. According to the efficient-market hypothesis, investors avail themselves of all the information available in the market, and then attempt a thorough and painstaking interpretation of it. The empirical evidence, however, reveals that most investors fail to implement rigorous information processing, thereby rendering to a number of behavioral theories concerning market inefficiency and biased information processing. The current research sets out to identify and scrutinize the impact of the CEO’s perceptual biases in judgment and economic decision-making on the reporting quality of the firms listed on the Tehran Stock Exchange. Adopting a mixed method, the present study first seeks to detect the components and indices of CEO’s perceptual biases via critical appraisal and with the special participation of 10 accounting experts. Afterwards, the recognized indices are set to undergo a Delphi analysis given the mean and the coefficient of agreement. The verified indices are then adapted to the accounting models and analyzed in the form of research hypotheses. The results of qualitative analysis using Delphi method verify the reliability of 16 indices out of 22 ones. Regarding the quantitative analysis, the association between the indices of the CEO’s perceptual biases in judgment and economic decision-making, and the primary proxies of financial reporting, namely reliability and competitiveness is tested. The findings reveal that the indices of the CEO’s perceptual biases in judgment and economic decision-making exert a significantly negative effect on financial reporting reliability and competitiveness.