Management Speaks, Investors Listen: Are Investors Too Focused on Managerial Disclosures?

35 Pages Posted: 28 Dec 2011 Last revised: 2 Dec 2013

Lisa Koonce

University of Texas

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance

James Smith

University of Saskatchewan - Edwards School of Business

Date Written: December 1, 2013

Abstract

Market regulators are concerned about the completeness of management-provided explanations in financial reports and other venues. In particular, the Securities and Exchange Commission has articulated the growing problem of firm managers selectively emphasizing information that is favorable to their firm’s financial status. In this two-experiment study, we examine whether investors are adversely influenced when firm managers provide only a partial explanation for a firm’s financial outcomes, even though the investors have information about all of the causes for a firm’s financial outcomes. Our results reveal that investors are misled by partial management explanations. We demonstrate that this effect occurs in situation both when qualitative information is known about the causes and when quantitative information is known about the causes. We document that one way in which this overreliance on management- provided partial information can be mitigated is when investors are provided with a quantitative analysis of the management explanation; with this quantitative analysis we observe that investors are able to distinguish between partial and complete explanations. Our study has implications for regulators and researchers.

Keywords: Financial disclosure, management explanations, investors

Suggested Citation

Koonce, Lisa and Seybert, Nicholas and Smith, James, Management Speaks, Investors Listen: Are Investors Too Focused on Managerial Disclosures? (December 1, 2013). Available at SSRN: https://ssrn.com/abstract=1977331 or http://dx.doi.org/10.2139/ssrn.1977331

Lisa L. Koonce (Contact Author)

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

Nicholas Seybert

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

James Smith

University of Saskatchewan - Edwards School of Business ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada

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