Nonfinancial Measures and Fraud Risk: Evaluating Investors’ Reactions to Greater Transparency

54 Pages Posted: 12 Jan 2010 Last revised: 4 Aug 2020

See all articles by Joseph F. Brazel

Joseph F. Brazel

North Carolina State University - Poole College of Management - Department of Accounting

Tina Carpenter

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Keith L. Jones

University of Kansas

Jane M. Thayer

University of Virginia

Date Written: August 4, 2020

Abstract

We examine whether increased transparency in the comparison of financial measures and nonfinancial measures (NFMs) influences nonprofessional investors’ reactions to the risk of fraudulent financial reporting. We consider a comparison of key financial measures and NFMs to be transparent when the relevant information is presented in close proximity and formatted to provide an easy comparison of the individual measures. We manipulate the presence of an NFM red flag and the transparency of the comparison of financial measures and NFMs. We find that when the NFM red flag is present (i.e., higher fraud risk) and transparent, investors choose lower investment levels. However, without increased transparency, as is typical in the current reporting environment, we observe that investors are more likely to increase their investment levels in firms with elevated fraud risk. Additionally, we observe that the effect of transparency on investment levels is driven by investors with greater investing experience.

Keywords: fraud, investor, nonfinancial measures, red flag

JEL Classification: M40, M41

Suggested Citation

Brazel, Joseph F. and Carpenter, Tina and Jones, Keith Lamar and Thayer, Jane M., Nonfinancial Measures and Fraud Risk: Evaluating Investors’ Reactions to Greater Transparency (August 4, 2020). Available at SSRN: https://ssrn.com/abstract=1534888 or http://dx.doi.org/10.2139/ssrn.1534888

Joseph F. Brazel (Contact Author)

North Carolina State University - Poole College of Management - Department of Accounting ( email )

Campus Box 8113
Nelson Hall
Raleigh, NC 27695
United States
919-513-1772 (Phone)

Tina Carpenter

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

230 Brooks Hall
Athens, GA 30602-6254
United States
706-542-3619 (Phone)

Keith Lamar Jones

University of Kansas ( email )

1654 Naismith Drive
MS 5F4
Lawrence, KS 66045
United States
785-864-6997 (Phone)
785-864-5328 (Fax)

Jane M. Thayer

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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