Numerical Formats within Risk Disclosures and the Moderating Effect of Investors’ Concerns About Management Discretion
Posted: 8 Jun 2011 Last revised: 22 Oct 2015
Date Written: July 21, 2014
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
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