The Effects of off-balance Sheet Financing Types and Directional Preference on Investors’ Perceived Credibility in Financial Reporting

Abstract

This research study was carried out as an experimental research. Its objectives were to study the impact of off-balance sheet financing types and investors’ directional preference on investors’ perceived credibility in financial reporting. This research is of 2 x 3 full factorial between subject design that manipulates (1) the type of off-balance sheet financing (operating lease vs. unconsolidated subsidiaries) and (2) the participant’s investment position (short, long and neutral). The subject groups involved in the study were 186 MBA students. The research findings showed that (1) given by the investors’ knowledge of creative accounting, the research provides evidence that long investors were biased from their directional goal for the firm’s positive performance as compared to prospective investor (2) complexity level of off-balance sheet types did not affect investors’ perceived credibility in financial reporting, and (3) the investors’ knowledge of creative accounting was inversely correlated to their perceived credibility of financial statements. The implication of the findings could serve as a caution for non-professional investors that investment preference could undermine their rationale and reduce their ability to assess credibility of manipulated financial reporting. The results also suggested that investors’ knowledge of creative accounting should be treated as a control variable in accounting research on investors’ perceived credibility of financial statements when they face with accounting manipulations.