Functional Fixation: Investigation of the influence of EPS on Companies financial decisions

Functional fixation is the view that individual investor interpret accounting information without regard for the rules used to arrive at the information. It says that investors can be misled by firms accounting methods and choices. Given that the investors perceived preoccupation with short term EPS as an indicator of company performance, it seems highly probable that the effect on the EPS will be a key consideration in the debt-equity choice, i.e. there is a functional fixation on short term EPS.The primary focus of this study is to address the question of the extent to which financing decisions can be explained on the basis of behavior conditioned by financial reporting practices – in particular to those relating to the calculation of the earning per share. Thus, the key point at the issue is whether or not the debt-equity choice appears to be a function of financial reporting practice.