Does Estimation Uncertainty Affect Investors’ Preference for the Form of Financial Statement Presentation?

Abstract:     
The uncertainty underlying transactions and estimates, and how it is communicated in financial statements, is of increasing concern to financial statement users, preparers, standard setters, and auditors. In this study we examine how the underlying uncertainty of financial statement information influences well-informed investors’ preference for point versus range presentation. Consistent with congruity theory (Budescu and Wallsten 1995), which states that individuals prefer the form of communication that best correlates to the inherent precision or uncertainty of the information communicated, we find that as uncertainty increases, investors prefer that financial information be presented as a range rather than a point estimate. We also find that investors deem ranges more accurate, credible and informative than point estimates, especially in situations of high uncertainty. These findings provide regulators with a clearer idea of how investors view uncertainty and the form in which they prefer uncertain financial information to be communicated.

Number of Pages in PDF File: 48

Keywords: Estimation Uncertainty, Financial Statement Presentation, Financial Statements

JEL Classification: M4, M40, M41, M48

working papers series