The Effect of Investor Sophistication on the Influence of Nonfinancial Performance Indicators on Investors’ Judgments
32 Pages Posted: 5 Jun 2011
Date Written: September 4, 2009
This paper presents an experiment that examines how enhanced disclosure of nonfinancial performance indicators affects the stock-price estimates of nonprofessional and professional investors. An experiment was conducted using nonprofessional and professional investors who were provided with a case study containing excerpts from a hypothetical company’s annual report. The experiment was a 2 (nonprofessional and professional) x 3 (positive nonfinancial performance indicators, negative nonfinancial performance indicators, and financial information only) between-subjects design. Consistent with conservatism, the nonprofessional investors underreacted in their stock-price estimates to the positive nonfinancial disclosures, compared to professional investors with task-specific knowledge. A significant difference was not found between the two groups for the negative disclosures, however, both groups reacted more to the negative disclosures than the positive ones, suggesting a negative bias in information evaluation. The results from this study suggest that the value of enhanced disclosure of this type may not flow equally to all users of financial reports. It also indicates that regulatory intervention to enhance disclosure to all investors may not have the desired effect if conservatism, and lack of task-specific knowledge, adversely affect their decision-making.
Keywords: Nonprofessional investors, Nonfinancial performance indicators, Conservatism, Task-specific knowledge
JEL Classification: M40
Suggested Citation: Suggested Citation