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

Posted: 30 May 2008 Last revised: 30 Jan 2009

See all articles by Hun-Tong Tan

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Seet-Koh Tan

Nanyang Technological University (NTU) - Division of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

Disclosure of material earnings-relevant information through corporate and news websites is increasingly popular, and so is the frequency of corrections to initial disclosures made. The formats adopted for such corrections differ in terms of the placement of the erroneous disclosure relative to the original disclosure, as well as the presence or absence of a forewarning of correction. We conduct an experiment to investigate whether erroneous earnings-related disclosures that are subsequently corrected by management continue to influence individual investors' earnings potential assessments, and whether this effect is moderated by the format of the correction. Using M.B.A. students as proxies for investors, we conduct an experiment involving a context where a firm announces the negotiation outcome of a major contract, and then subsequently corrects this announcement. For a correction format where the erroneous disclosure is placed before the correction, participants' assessments of the likelihood of winning the contract and the firm's earnings potential continue to be influenced by the erroneous disclosure, despite the presence of a correction. For such correction formats where the erroneous disclosure is placed before the correction, presence of a warning of a correction before they read the erroneous disclosure does not mitigate the effect. Our experimental results provide some support that a correction format where the correction is placed prior to the erroneous disclosure reduces the influence of the erroneous disclosure.

Keywords: corrected disclosure, correction formats, investor judgments

JEL Classification: M41, M45, C91

Suggested Citation

Tan, Hun-Tong and Tan, Seet-Koh, Investors' Reactions to Management Disclosure Corrections: Does Presentation Format Matter? (2009). Contemporary Accounting Research, Volume 26 Issue 2, Available at SSRN: https://ssrn.com/abstract=1139195

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

Seet-Koh Tan (Contact Author)

Nanyang Technological University (NTU) - Division of Accounting ( email )

Singapore, 639798
Singapore

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