Consensus Information and Non-Professional Investors’ Reaction to the Revelation of Estimate Inaccuracies

Abstract

To curb opportunism in financial reporting, scholars and regulators have proposed that firms be required to report reconciliations of prior year estimates. We provide experimental evidence that such disclosures are not sufficient for non-professional investors to identify those firms that are opportunistic in their estimates. We also offer evidence suggesting that the value of these disclosures can be enhanced when non-professional investors seek out information about the estimate accuracy of other firms in the industry (i.e., consensus information). Our study provides insights about these disclosures and the mechanisms that enhance their effectiveness. Our findings have broad implications for standard setters and future research designed to assist in identifying opportunistic management behavior.

Keywords: estimates, disclosures, opportunistic financial reporting

JEL Classification: M41, M43, M45, G38