Aspiration level effects: An empirical investigation

doi:10.1016/0167-2681(88)90060-1

Journal of Economic Behavior & Organization

Volume 10, Issue 4, December 1988, Pages 389-400

https://doi.org/10.1016/0167-2681(88)90060-1 Get rights and content

Abstract

Theories of aspiration level effects predict that decisions under uncertainty will depend on whether performance is above or below some target level of performance. A sample of 5000 quarterly earnings announcements by publicity held companies listed on the COMPUSTAT and CRSP data bases is examined to test this hypothesis. Four models from the current accounting literature are used as alternative estimates of the target level of earnings for these firms. When earnings are announced the difference between actual and forecast earnings, here called a forecast error, can be computed. The data indicate that the relationship between valuation and forecast error differs conditional on the sign of the forecast error.

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These features give rise to a discontinuity in the utility function for aspiration levels and a kinked utility function under loss aversion. The presence of aspirational levels in risky projects has been found in a number of experimental and empirical studies (see e.g., Holthausen, 1981; Mezias, 1988; Langer and Weber, 2001; Mezias et al., 2002). There is also a growing literature examining aspirations in developing countries.
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^∗: I would like to thank my colleagues whose helpful comments at various seminars have been invaluable. I am indebted to Terry Shevlin for his extensive help in preparing the data for this study, to George Foster for allowing me to use this data set, to Theresa Lant, and Jim March for their comments on numerous drafts as this work progressed, and to Richard Day for his superb editorial assistance. Comments on earlier drafts by Bill Beaver, Jon Bendor, Keith Weigelt, and an anonymous reviewer are acknowledged gratefully.

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Aspiration level effects: An empirical investigation

Abstract

Journal of Accounting and Economics

Journal of Economic Behavior and Organization

Journal of Financial Economics

Essays in the theory of risk-bearing

Corporate financial reporting: A methodological review of empirical research

Journal of Accounting Research

Econometric properties of alternative security return methods

Journal of Accounting Research

The association between unsystematic security returns and the magnitude of forecast errors

Journal of Accounting Research

Risk preference: Empirical evidence and its implications for capital budgeting

A behavioral theory of the firm

Mean-risk analysis with risk associated with below target returns

American Economic Review

Financial statement analysis

Earnings releases, anomalies, and the behavior of security returns

The Accounting Review