The Effects of Presentation Salience and Measurement Subjectivity on Nonprofessional Investors’ Fair Value Judgments
47 Pages Posted: 20 May 2010 Last revised: 22 Apr 2014
Date Written: March 8, 2013
Fair value estimates reported in the financial statements differ in the subjectivity with which the estimates are measured. Mandated supplemental disclosures are intended to enable users to assess the nature of the inputs used to develop the fair value measurements, including their relative reliability, although prior research suggests some investors may have difficulty doing so. We draw on information processing research to predict and find that isolating fair value information in a separate column on the face of the income statement facilitates nonprofessional investors’ ability to incorporate into their perceived reliability and P/E judgments not only the fair value estimates, but also the disclosed measurement differences that underlie those estimates. Our results have implications for standard setters and researchers concerned with the effects of financial statement presentation on nonprofessional investors. Namely, we demonstrate how income statement presentation can improve reliance on mandated supplemental disclosures, thereby resulting in greater financial statement transparency.
Keywords: financial statement presentation, measurement subjectivity, limited attention, nonprofessional investors
JEL Classification: M41
Suggested Citation: Suggested Citation