Present Value: Ryan Guggenmos and Kristina Rennekamp discuss the human side of accounting
Present Value, an independent editorial project produced and hosted by Johnson students, had the pleasure of interviewing Ryan Guggenmos, assistant professor of accounting, and Kristina Rennekamp, MS ’11, PhD ’12, associate professor of accounting, at the Samuel Curtis Johnson Graduate School of Management.
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What is behavioral accounting?
Accounting professors Ryan Guggenmos and Kristina Rennekamp, MS ’11, PhD ’12, specialize in behavioral accounting, a field that draws from both psychology and economics to better understand the decisions that different individuals make in the financial reporting process, whether they be auditors, managers, analysts, or investors. As Rennekamp explains, behavioral accounting “recognizes that people aren’t machines and they’re not going to always behave very rationally.”
For example, Guggenmos has studied how the same incentives used to encourage creativity in an organization can also incentivize real earnings management within a firm. In his study (The Effects of Creative Culture on Real Earnings Management), he finds that managers within a more creative organization are more likely to delay investments into their business, leading to the detriment of the overall performance of the company.
Rennekamp has studied the effect of accounting regulations on managers’ behavior, finding that when an asset impairment is reversible, managers will continue to invest in the asset well past the point that a manager in the same economic situation with irreversible asset impairment would.
These examples are two of the many scenarios in which accounting goes beyond recording cash accounts, or focusing on past activity, to looking at the impact of individuals’ behavior, or projecting future activity.
Pro forma vs. GAAP earnings
Public companies in the United States must follow a set of standards defined as Generally Accepted Accounting Principles (GAAP) when reporting financial information. Recently, there has been an increasing prevalence of the use of pro forma or non-GAAP earnings to supplement GAAP disclosures. Netflix, for example, reports the pro forma figure of “contribution margin,” which excludes the cost of their extensive technology investments and presents them as more profitable.
Guggenmos and Rennekamp have looked at the impact of pro forma or non-GAAP earnings on investors and managers. Guggenmos explains that what piqued his interest in this area is the lack of oversight and large discrepancies between pro forma and GAAP earnings. He says that when companies use pro forma earnings, they are implying: “I know there are these [GAAP] rules, but forget that for a second” and let’s use this metric instead.
In their research, Guggenmos and Rennekamp find that when companies are allowed to report non-GAAP earnings, the quality of their GAAP earnings increases. Rennekamp explains that managers perhaps “feel like they can get their story out in other ways [through non-GAAP numbers],” which leads them to use less discretion in the audited GAAP numbers. However, it remains difficult for an investor to distinguish between a high-quality or low-quality earnings figure, whether it be GAAP or non-GAAP, due to the many different factors and decisions that go into financial reporting.
I-FOMO or investor fear of missing out
Guggenmos and Rennekamp have also built on the existing social research into the “fear of missing out” (FOMO) and extended the concept to the investment domain by coining the term “I-FOMO,” defined as “investor fear of missing out.” The impetus for I-FOMO came from the observation that investors are now inundated with communications from multiple sources, ranging from the company itself to third party sources including Twitter, brokerage services, and news services. Via these new sources of communication, information is delivered in shorter bursts and is pushed directly to users via mobile notifications. Rennekamp provides an example that many can relate to: “You’re having a nice conversation, and there’s that one friend who just can’t stop picking up the phone to check for market news.”
The I-FOMO scale aims to assess the impact of this 24/7 information cycle on individual investors and their trading decisions. An individual who ranks more highly on the I-FOMO scale checks for investment information more frequently and reacts more strongly to the information. While their research has not established high I-FOMO as bad or good, they have identified a change in behavior for a subset of individuals due to these new forms of investor communication, an area that warrants further research to identify the consequences.
For more, check out the full-length Present Value podcast, Bias in Decision-Making, Social Media’s Role in Investor Communication, and I-FOMO | Ryan Guggenmos and Kristina Rennekamp, MS ’11, PhD ’12. Listen, subscribe, and share!
About Ryan Guggenmos
Ryan Guggenmos is an assistant professor of accounting at the Samuel Curtis Johnson Graduate School of Management. His research focuses on how biases in human behavior affect decision processes in accounting contexts. He received his PhD from the University of Massachusetts Amherst and his BA from Seattle University. At Johnson, he teaches the popular elective Managerial Accounting and Reporting.
About Kristina Rennekamp
Kristina Rennekamp, MS ’11, PhD ’12, is an associate professor of accounting at the Samuel Curtis Johnson Graduate School of Management. Her research examines financial accounting from a behavioral perspective, and particularly how biases affect managers’ disclosure decisions and users’ judgments with respect to those disclosures. She received her master’s of science and PhD from Johnson and earned her MBA and bachelor’s of business administration from the University of Iowa. At Johnson, she teaches the Core Financial Accounting class for the Ithaca residential MBA programs. Rennekamp was named one of Poets & Quants “Best 40 under 40 Professors” in 2017.