Numerical Formats within Risk Disclosures and the Moderating Effect of Investors' Concerns about Management Discretion

Abstract

We report the results of two experiments that provide evidence that investors' risk judgments are affected by the numerical format used to describe outcomes within accounting disclosures. Consistent with prior research in psychology, investors assess higher risk in response to dollar-formatted disclosures than to equivalent percentage-formatted disclosures. Consistent with the Persuasion Knowledge Model (Friestad and Wright 1994), this effect is moderated when investors have both (1) awareness that management has discretion over format, and (2) sufficient cognitive capacity to consider its implications. Our results provide insight about the effects of current disclosure formats and suggest implications for managers who choose formats, investors who interpret formatted information, and regulators who consider whether to further prescribe the formats that are used in financial disclosures.

Financial estimates against investors’ preferences: anchoring, denial and spillover effects

“…Much previous financial accounting research has focused on the decision usefulness of the accounting information provided (see, for example, , Elliott et al 2011, Nelson and Rupar 2015, with implications for policy, the quality of financial information and the need for investor education programmes. In a similar vein, this study examines how investors use one of the most prominently disclosed sources of accounting information, namely sensitivity disclosures.…”

“…Accounting standards often allow managers flexibility in the format of their disclosures, including sensitivity disclosures, leading to variation in their placement, transparency and labelling (Koonce and Mercer 2005). Companies typically have flexibility in their choice of disclosure parameters for the same sensitivity, 1 and there is considerable variation across companies' choice of parameters (Nelson and Rupar 2015).…”

“…Extant financial disclosure research (Nelson and Rupar 2015) has found that the format of the output of sensitivity disclosures impacts on investors' judgments, suggesting that the impact of the format of determinants on investors' judgments should also be examined. This paper focuses on the format of one such determinant, namely the hypothetical change used.…”

“…This paper focuses on the format of one such determinant, namely the hypothetical change used. Previous financial disclosure research has shown that investors anchor on the parameters presented to them (Kennedy et al 1998, Nelson andRupar 2015), which affects their judgments on issues relating to information in the disclosure. I extend this finding by showing that the parameters of a disclosure may also affect investors' judgments of issues unrelated to the disclosure.…”

“…Although previous financial disclosure research has examined sensitivity disclosures , Elliott et al 2007b, Nelson and Rupar 2015, it has neither studied the relationship between the level of threat to investors' preferences and investors' reactions to sensitivity disclosures, nor the impact of sensitivity disclosures on investors' unrelated judgments. Importantly, previous research on sensitivity disclosures has focused on prospective investors, whereas I focus on current investors who have already invested in the company.…”