Numerical Formats within Risk Disclosures and the Moderating Effect of Investors’ Concerns About Management Discretion

Posted: 8 Jun 2011 Last revised: 22 Oct 2015

See all articles by Mark W. Nelson

Mark W. Nelson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Kathy Rupar

Georgia Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: July 21, 2014

Abstract

We report the results of two experiments that provide evidence that investors’ risk judgments are affected by the numerical format used to describe outcomes within accounting disclosures. Consistent with prior research in psychology, investors assess higher risk in response to dollar-formatted disclosures than equivalent percentage-formatted disclosures. Consistent with the Persuasion Knowledge Model (Friestad and Wright 1994), this effect is moderated when investors have both (1) awareness that management has discretion over format and (2) sufficient cognitive capacity to consider its implications. Our results provide insight about the effects of current disclosure formats and suggest implications for managers who choose formats, investors who interpret formatted information, and regulators who consider whether to further prescribe the formats that are used in financial disclosures.

Keywords: numerical format, sensitivity analysis, risk judgment, reporting discretion, persuasion knowledge model, cognitive capacity

Suggested Citation

Nelson, Mark W. and Rupar, Kathy, Numerical Formats within Risk Disclosures and the Moderating Effect of Investors’ Concerns About Management Discretion (July 21, 2014). Accounting Review, Vol. 90 (3): 1149-1168. Available at SSRN: https://ssrn.com/abstract=1859603 or http://dx.doi.org/10.2139/ssrn.1859603

Mark W. Nelson

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

448 Sage Hall
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Kathy Rupar (Contact Author)

Georgia Institute of Technology ( email )

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Atlanta, GA 30308-1149
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