Investors' Reactions to Management Disclosure Corrections: Does Presentation Format Matter?

Fifty-year overview of judgment and decision-making research in accounting

“…Krische suggested that memory limitations were responsible for the difference in the forecasting decisions of investors. Tan and Tan (2009) found that erroneous disclosures (even if subsequently corrected) continued to influence an investor's final assessment of the firm's earnings potential. The investors' judgments were less influenced by the erroneous disclosure when the corrected disclosure was placed before the original disclosure.…”

Level of business insights in the MD&A and nonprofessional investors' judgments

“…However, recent accounting studies (e.g. Tan and Tan, 2009;Tan and Koonce, 2011;Coram, 2010) show that nonprofessional investors are subject to psychological/cognitive biases in their information processing, such that they make decisions that deviate from the predictions of economic models. These biases seem to be especially strong when investors lack investment experience and knowledge (e.g.…”

Effects of Exposure to Subsequently Invalidated Evidence on Judgements of Audit Workpaper Preparers and Reviewers*

“…They found that these participants' original beliefs were immune to subsequent invalidation. A more recent study found that when MBA students were presented with both erroneous and corrected information simultaneously, they were immune to the erroneous information if the correction was placed before the original erroneous information, but not when the correction was placed after (Tan and Tan 2007).…”

“…However, psychology research indicates that once evidence has been assimilated, the evidence and associated judgement are separately stored; thus, even if the evidence is later deemed erroneous, its judgement effects may linger on, and it is difficult for the decisionmaker to cognitively remove its influence (Ross, Lepper, and Hubbard 1975;Johnson and Seifert 1994;Seifert 2002). In an investment-decision setting, Master of Business Administration (MBA) students have been found to be susceptible to the influence of invalidated evidence despite the presence of a correction (Tan and Tan 2007). However, these prior studies use students as participants, and students' sensitivity to evidence validity is likely lower than that of auditors, whose professional duties involve assessing the validity of audit evidence (PCAOB 2003, AU 326;IAASB 2004, ISA 500).…”