THESIS TITLE: A QUALITATIVE STUDY OF STOCK MARKET INVESTORS’

PERCEPTION OF ACCOUNTING PRACTICES AND INVESTMENT BEHAVIOR:

Critical Review by ABHISHEK GUPTA (MS19S002)

THESIS AUTHOR: Richsarod Hudson

Year of research: May 2008

Research problem:

The stock market investors felt declination of confidence due to the violations of the generally
accepted accounting principles (GAAP) since 2001.Enron, one of the largest energy companies
in the United States filed a form 8-K to the SEC disclosing that its financial reporting over a six-
year period did not meet GAAP compliance. The company’s stock lost 90% of its value from
December of 2000 to November of 2001 and ultimately filed bankruptcy in December
2001.WorldCom, one of the largest telecommunication companies announced that it had had
restated its financial statements for 2001 and the first quarter of 2002 by $3.831 billion. The
telecommunication company observed accounting errors valued at 11 billion dollars after a
complete assessment of corporate financial records by internal accountants. The restated
accounting errors caused some shareholders to lose their life savings, while simultaneously
placing a strain on the U.S. economy. The problem is that little is known about investors’
perceptions of accounting practices for U.S. public companies, and how those perceptions
influence stock market investors’ future investment behaviors.

The current qualitative constructivist grounded theory design study explored the perceptions of
20 stock market investors on misstated accounting practices in U.S. corporations, and how
those perceptions influenced future investment behaviors. The data gathered for the study
might provide leaders information on how accounting practices influence future investment
behavior from shareholders.

RESEARCH QUESTION:

The study explored the perceptions of 20 stock market investors on accounting practices among
U.S. companies, and how those perceptions impact future investment behaviors. The research
questions explored in the study were:

RQ1: What are the stock market investors’ perceptions of ethical behavior from previous
misstated accounting records in U.S. companies?

RQ2: How do stock market investors’ perceptions of misstated accounting records influence
future investment behavior in U.S. companies?

SCOPE OF RESEARCH QUESTION:

The scope of the study includes a qualitative approach that explored the perceptions of a small
population in the southeast area of the U.S. on the perceptions of accounting practices in U.S.
companies, and how those perceptions influence future investment behaviors. A one-on-one
interview with each participant was conducted to gather insight on their perceptions of
accounting practices in United States companies, and how the implementation or lack of ethical
accounting procedures impact their future investing behaviors. The study was limited by the
honesty of the subjects’ responses during the interviews. The study was limited by the amount of
time available to conduct the study. Validity of the study was limited to the reliability of the
instruments used.

Domain of focus: this thesis mainly focuses on perception of stock market investor on
accounting practices and how these perception impact future investment behavior.

CHOICE OF METHODOLOGY:

The author used qualitative methodology. The study used a qualitative constructivist grounded
theory approach to gain insight from specific participants that invested in U.S. corporations that
were exposed to unethical accounting practices during their active involvement in the U.S. stock
market. He used exploratory research. A one-on-one interview with each participant was
conducted to gather insight on their perceptions of accounting practices in United States
companies, and how the implementation or lack of ethical accounting procedures impact their
future investing behaviors.

Choice of theory:

The theoretical framework of the current study focused on three concepts that serve as the basis
for the study of corporate governance, ethics, and perception. The business ethics theory and the
managerial theory of social responsibility served as a theoretical framework that supports
corporate governance and social responsibility. The fundamental system of ethics that makes up
the theoretical framework in the study was the agency theory. From a perception point of view,
the attribution and the risk perception theory served as the foundation for what the study was
based upon.

Business Ethics Theory

This is a process that requires organizations to develop a social system that supports an ethical
culture where stakeholders are less likely to participate in misconduct. Leaders practicing
business ethics can give an organization an added value to stakeholders, which can create a
collaborative effort to compete effectively. The business ethics theory defines managers as the
agents of shareholders to be the governing authority that sustain revenue, implement good
business practices, and provide transparent reporting. Corporate governance involves leaders
addressing an array of business-related issues to meet the needs of stakeholders. Managers must
address a variety of complex issues, while corporate social responsibility guides managerial
decision making and policy formation. The role of ethics is to provide a basis for choice,
decision making, and action as it applies to protecting and insuring investors’ net worth. Ethics
provides the basis for moral standing.

Managerial Theory of Social Responsibility

Such theorists argue that businesses, particularly large institutions, have a number of interest
groups or constituents both internally and externally that managers must deal with regularly, not
just stockholders and a board of directors. A business has employees, customers, suppliers,
consumers, activist groups, government regulators, and others that influence decision making
and the ability of the entity to make profits and determine policies (Kubasek, Brennan, & rowne,
2003). Businesses have responsibilities to their stakeholders’ needs and each stakeholder’s needs
are not equally valued by management but are categorized in a hierarchical structure. Carroll (as
cited by Seifert, Morris, & Bartkus, 2003) argued:
A firm’s social responsibilities fall in a hierarchy; from most to least important, they are
economic, legal, ethical, and so-called discretionary responsibilities. First, firms are economic
institutions – managers have an obligation to seek a just for owners (thus, the notion of corporate
social responsibility is derived from neoclassical economics). Legal and ethical responsibilities
are second and third in importance (p.197).

Attribution Theory

Attribution theory is theory that describes the process of explaining events and the behavioral
and emotional consequences of those explanations. It suggests that individuals’ behaviors are
based on how information is perceived and interpreted, and that perception provides meaningful
information to the perceiver as a means for formulating a decision. Due to lack of corporate
governance and ethical accounting practices, investors are concerned about financial
mismanagement in U.S. corporations. This has influenced investors’ perceptions on future
investments in corporate America. It defines how the perceptions determine investor’s
confidence in corporate leadership and how unethical behavior is interpreted, which may lead to
a decline in investing in corporate America.

Risk Perception Theory

Perceived risks and some level of vulnerability of risks and the severity of that risk based on
individuals’ beliefs or attitudes. Customers who experience a high perception of risk in an
organization’s ethical performance are less likely to remain loyal and trust an executive leader’s
decision-making process. With the risk of losing customers, the practice of good ethics is to an
organization’s competitive advantage to leverage their ethical performance to gain and keep
loyal shareholders by establishing a corporate culture that embraces sound ethical practices.
Investing in United States companies alone possesses some risks, and companies that practice
unethical acts are an added peril that investors cannot afford. The perception of risk is believed
to influence investor’s decisions and attitudes on current and future investments. Investors tend
to examine companies on their performance and are more likely to favor the organizations with
fewer problems and less reconciliation with investors after restating their financial balance sheet.
Ontology

Ontology is a system of belief that reflects an interpretation by an individual about what

constitutes a fact. It is associated with a central question of whether social entities should be
perceived as objective or subjective. This research believes in a subjective approach. The
author has used inductive approach to analyze the data, categorizing and comparing the data
then summarizing the characteristics of the data to generate theories. Qualitative data are in the
form of words describing people, actions, and events in social life. Data were analyzed and
coded by the NVIVO 7 software to extract meaning from a range of textual information, such as
interviews and questionnaires used in the study. To remove researcher’s bias the confidentiality
of names of the participant’s was ensured. NVIVO 7 is qualitative analysis software designed to
aid users in managing, organizing, and supporting research in qualitative data analysis research.
The grounded theory research approach commonly uses NVIVO codes to label categories or
themes that are phrased in the exact words of participants, rather than the words of the researcher
or social science or educational terms (Creswell, 2002). The NVIVO 7 software adds value in
linking data and shaping data into sets and codes the data based on participant’s feedback. The
grounded theory design sought to follow a systematic process or action to form a theory that
explains the process.

Epistemology

Epistemology follows from ontology. Epistemology depends on the way we believe nature of
reality to be (Lee and Lings, 2008). The author follows an interpretivist approach. It is subject
to researcher’s interpretation. The study used an unstructured interview approach to collect data
from the participants. The unstructured interview approach allowed the participants the
opportunity to elaborate on their responses without forced selection on a specific group of
answers designed by the researcher. The interviews with the participants were conducted face-
to-face, one-on-one, in a private area that allowed the participants to feel comfortable in
revealing their thoughts without negative retaliations from outside sources. Primary data
generated in interpretivist studies cannot be generalized since data is heavily impacted by
personal viewpoint and values. Therefore, reliability and representativeness of data is
undermined to a certain extent as well.

To assure reliable and valid information, data were collected from participants that are
experienced investors in the stock market with five or more years in investing in U.S.
corporations. The data collected from experienced investors in the stock market served as
reliable information based on investor’s knowledge of stock market performance and corporate
leader’s investment activities.

Secondary data from data were also collected from other outside sources, to include scholarly
articles and previously published material that compliments the study. The objective of
secondary data was to find facts on previous trends that may affect or benefit stock market
investors and allow the researcher to develop the theory.

Axiology:

Axiology follows from ontology. It is essence about the ‘aims’ of your research. What the
researcher is trying to do? The purpose of the research was to explore stock market investors’
perceptions of ethical behavior from previous misstated accounting errors in U.S. corporations,
and how those perceptions influenced the future investment behaviors of 20 investors living in
the southeast region of the United States.

Limitation:

Primary data generated in interpretivist studies cannot be generalized since data is heavily
impacted by personal viewpoint and values. Therefore, reliability and representativeness of data
is undermined to a certain extent as well. A one-on-one interview with each participant was
conducted to gather insight on their perceptions of accounting practices in United States
companies, and how the implementation or lack of ethical accounting procedures impact their
future investing behaviors. The study was limited by the honesty of the subjects’ responses
during the interviews. The study was limited by the amount of time available to conduct the
study. Validity of the study was limited to the reliability of the instruments used.

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