Investor Judgments: Linking Dependent Measures to Constructs

Abstract

The literature on investor judgments and decisions has grown substantially in recent years. With that growth has come an increase in the number and types of dependent measures used by researchers, but the construct validity of these measures has received relatively little attention. In this paper, we first survey the literature to understand the types of dependent measures typically used by researchers. We then conduct factor analyses to uncover linkages between the dependent measures and investor judgment constructs. Our results suggest that, while the wide variety of dependent measures used by researchers can appear on their face to represent many nuanced economic constructs, these measures load onto three distinct factors that represent inputs to investors’ decision-making process. The three factors relate to (1) expectations regarding future firm performance and value, (2) investment preferences towards and general perceptions of the firm, and (3) evaluations of the risk associated with investing in the firm. Based on this empirical data, we conclude with a discussion of the implications of our findings for future research on investor judgments and provide recommendations to guide experimental researchers, reviewers, and editors as this literature continues to move forward.

Keywords: investor judgments, construct validity, experimental design