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

See all articles by Shana Clor-Proell

Shana Clor-Proell

Texas Christian University - Department of Accounting

Chad A. Proell

TCU - Department of Accounting

Terry Warfield

University of Wisconsin - Wisconsin School of Business

Date Written: March 8, 2013

Abstract

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

Clor-Proell, Shana and Proell, Chad A. and Warfield, Terry D., The Effects of Presentation Salience and Measurement Subjectivity on Nonprofessional Investors’ Fair Value Judgments (March 8, 2013). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1611802 or http://dx.doi.org/10.2139/ssrn.1611802

Shana Clor-Proell (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Chad A. Proell

TCU - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Terry D. Warfield

University of Wisconsin - Wisconsin School of Business ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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