Numerical Formats within Risk Disclosures and the Moderating Effect of Investors’ Disclosure Management Concerns

Abstract:     
We provide experimental evidence that investors’ risk judgments are affected by the numerical format of sensitivity-analysis disclosures, with investors assessing higher risk in response to dollar-formatted disclosures than percentage-formatted disclosures. We also provide evidence that this effect is moderated by whether format is mandated or at the discretion of management. Specifically, investors respond to management discretion over numerical format by increasing risk assessments in response to percentage formats and decreasing risk assessments in response to dollar formats. In a second study we again support the moderating role of format discretion and provide evidence that the effect of discretion is not due to the extent of investors’ knowledge of alternative formats. 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.

Number of Pages in PDF File: 50

Keywords: numerical format effect, sensitivity analysis, risk judgment, earnings management, disclosure management, ratio bias

working papers series