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University of Arkansas, Fayetteville ScholarWorks@UARK Theses and Dissertations 12-1998 Accounting Expertise and Ill-Structured Problems: Cognitive Reasoning Abilities and Performance in Business Valuation Tasks Wray Bradley University of Arkansas, Fayetteville Follow this and additional works at: https://scholarworks.uark.edu/etd Part of the Accounting Commons Recommended Citation Bradley, Wray, "Accounting Expertise and Ill-Structured Problems: Cognitive Reasoning Abilities and Performance in Business Valuation Tasks" (1998). Theses and Dissertations. 3098. https://scholarworks.uark.edu/etd/3098 This Dissertation is brought to you for free and open access by ScholarWorks@UARK. It has been accepted for inclusion in Theses and Dissertations by an authorized administrator of ScholarWorks@UARK. For more information, please contact scholar@uark.edu, ccmiddle@uark.edu. ACCOUNTING EXPERTISE AND ILL-STRUCTURED PROBLEMS: COGNITIVE REASONING ABILITIES AND PERFORMANCE IN BUSINESS VALUATION TASKS Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ACCOUNTING EXPERTISE AND ILL-STRUCTURED PROBLEMS: COGNITIVE REASONING ABILITIES AND PERFORMANCE IN BUSINESS VALUATION TASKS A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy By WRAY E. BRADLEY. B.B.A., M.B.A.. J.D. Cleveland State University. 1984 Pace University. 1974 The University o f Texas at El Paso. 1970 December 1998 University of Arkansas Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ©1998 by Wray E. Bradley All Rights Reserved Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ACKNOWLEDGMENTS Unless the LORD builds the house, they labor in vain who build it... (Psalms 127:1) I would like to acknowledge my dependence upon the grace of a loving heavenly father. HIS grace has sustained me through six long years of the Ph.D. process. A dissertation may not seem like a team project. However, it has been my experience that without the assistance of many people 1 would net have made it nearly this far. I would like to acknowledge team members. First, my committee has been very supportive and patient with me. They have shown a genuine interest in both my personal and professional growth. The accounting faculty and accounting doctoral students (especially my friend and colleague, Steve Ludwig) have been most supportive of me. My wife, family, and close friends have always prayerfully supported me through the process (good times as well as bad). I offer heartfelt thanks to my committee, my friends , my colleagues, and especially my family. It really is a team project and it is my feeling that I have been blessed with the very best of teammates. iv Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. TABLE OF CONTENTS ACKNOWLEDGMENTS.........................................................................................iv Chapter 1. INTRODUCTION Motivation for the Study....................................................................I Contributions of this Research.......................................................... 4 Research Design.................................................................................6 2. BACKGROUND...................................................................................... 8 The Ability Factor in Previous Accounting Studies........................ 8 Previous Accounting Cognitive Difference Studies.......................13 A Call for Research on Specific Narrowly Focused Cognitive Abilities............................................................................................ 15 3. COGNITIVE REASONING ABILITIES AND ILL-STRUCTURED PROBLEMS........................................................ 16 Reasons for Examining Cognitive Reasoning Abilities................. 16 Reasoning and Ill-Structured Problems and Tasks.........................18 Summary..........................................................................................21 4. TASK ANALYSIS AND HYPOTHESES DEVELOPMENT.............25 Phases of the Business Valuation Engagement.............................. 25 Phase 1 - Assignment Definition and Orientation..............25 Phase 2 - Refinement of Initial Impression(s).................... 26 Phase 3 - Data Gathering..................................................... 27 Phase 4 - Preliminary Evaluation of Data.......................... 27 V Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Phase 5 - Analysis and Adjustment of Data....................... 28 Phase 6 - The V aluation..................................................... 29 Phase 7 - Report Preparation............................................... 30 Hypotheses Development.................................................................31 5. RESEARCH DESIGN AND STATISTICAL METHODOLOGY....................................................... 34 The Experimental Materials.............................................................34 The Case Study....................................................................34 The Background Information Form.................................... 36 The CCTST.......................................................................... 36 The Subjects......................................................................................37 Population Demographics....................................................37 Response Bias...................................................................... 39 Performance Measures.....................................................................43 Performance Scores Related to Reasoning Ability............44 The Expen Panel..................................................................47 Research Variables........................................................................... 49 Variables Related to Experience......................................... 49 Variables Related to Knowledge......................................... 50 The Ability Factor and a Modified Relationship...............52 Statistical Analyses.......................................................................... 52 Dependent Variables............................................................53 Independent Variables..........................................................53 vi Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Logistic Regression.............................................................54 Linear Regression................................................................54 ANOVA.............................................................................. 55 Summary..........................................................................................56 6. RESULTS OF THE STATISTICAL ANALYSES............................ 58 The Subjects and Expert/Novice Classification............................ 58 Initial Classification of Experts and Novices.................... 58 The Logistic Regression M odel......................................... 59 Descriptive Statistics........................................................... 60 Hypotheses Testing..........................................................................63 Linear Regression Methodology and Diagnostics............67 Experts and Reasoning Ability............................................67 Novices and Reasoning Ability...........................................71 Analysis of Variance-Novices and Experts........................73 Summary.......................................................................................... 84 7. DISCUSSION. LIMITATIONS. AND CONCLUDING REMARKS..................................................... 86 Discussion........................................................................................ 86 Construction Tasks.............................................................. 87 Reduction Tasks.................................................................. 89 Some Limitations and Implications for Future Research.............. 90 Statistical Power.................................................................. 90 Measurement Error...............................................................91 vii Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Structural Equations............................................................92 External Validity.................................................................93 Concluding Remarks....................................................................... 94 BIBLIOGRAPHY....................................................................................... 95 APPENDIX A - Medical Practice Valuation Case.................................. 102 APPENDIX B - Background Information................................................122 APPENDIX C - The California Critical Thinking Skills Test................ 125 viii Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Chapter 1 INTRODUCTION Gibbins and Swieringa (1995) imply that the phrase judgment research in accounting and auditing is a misnomer because behavioral accounting researchers have focused largely on the functional area of auditing. The study of auditors and audit tasks is. and will continue to be. very important. However, the accounting profession is undergoing unprecedented change due in part to rapid changes in technology and increasing globalization in the marketplace. Accountants increasingly are providing new services. One of the most rapidly growing areas of new business for the accounting profession is the provision of business valuation services'. This introductory chapter outlines the motivation for the current behavioral accounting research study that focuses on the emerging area of business valuation. In addition, the research contributions of the study are briefly discussed along with an overview o f the research design. Motivation for the Study Cheney (1997) reports that, in the United States, the greatest increase in new business for the 100 largest accounting firms is in the provision of business valuation services. Cheney estimates that at least 25 percent of practicing CPAs will be involved in business valuation during their careers. This emerging area of 1"Increasingly complex business transactions have resulted in a growing need for valuation engagements” (AlCPA 1998). CPAs are hired to provide business valuations for various reasons such as buy-sell agreements, mergers and acquisitions, estate and gift tax valuation, etc. 1 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.