The Impact of Descriptor Identicalness on Investors’ Judgements of Managers’ Opportunistic Estimation Choices

Abstract

We conduct two experiments to examine how descriptor identicalness influences investors’ assessments of managers’ opportunistic estimation choices. We manipulate the identicalness of descriptors (identical versus non-identical) and managers’ opportunistic estimation choices (more versus less opportunistic). We find that investors are better able to integrate information when managers use identical descriptors in their disclosures than when non-identical descriptors are used. We also find that investors who observe identical descriptors tend to make less favorable investment judgments when managers’ estimation choices are more (versus less) opportunistic, whereas those presented with non-identical descriptors are less likely to discern between more and less opportunistic estimation choices. Furthermore, our mediation results indicate that descriptor identicalness facilitates information integration, which moderates the impact of managers’ estimation choices on investors’ credibility assessments and subsequent investment judgments. Lastly, we measure investor sophistication and find that the interaction effect of managers’ estimation choices and descriptor identicalness is more pronounced when investors are more (versus less) sophisticated. Our findings have important implications for regulators, managers, and investors, shedding light on how investors use and incorporate accounting disclosures into their investment decision-making processes.

Keywords: Identical Descriptors; Opportunistic Estimation Choices; Narrative Disclosures; Investor Information Processing; Investor Sophistication