The Effect of Investor Sophistication on the Influence of Nonfinancial Performance Indicators on Investors’ Judgments

32 Pages Posted: 5 Jun 2011

See all articles by Paul Coram

Paul Coram

University of Adelaide - Business School; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

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

Coram, Paul J., The Effect of Investor Sophistication on the Influence of Nonfinancial Performance Indicators on Investors’ Judgments (September 4, 2009). Available at SSRN: or

Paul J. Coram (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

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