Nonprofessional Investor Judgments: Linking Dependent Variables to Constructs

Abstract

There is limited evidence on the construct validity of the dependent variables commonly used in
the literature on nonprofessional investor judgments. In this paper, we first survey the literature
to understand the types of dependent variables typically used by researchers. We then conduct
factor analyses to uncover linkages between dependent variables and nonprofessional investor
judgment constructs. Our results suggest that, while the wide variety of dependent variables can
appear on their face to represent many nuanced economic constructs, these measures load onto
three distinct factors. These factors relate to nonprofessional investors’ (1) expectations
regarding future firm performance and value, (2) wholistic perceptions of the firm, and (3)
evaluations of the risk associated with investing in the firm. Next, we provide recommendations
for selecting, analyzing, and reporting dependent variables in future research. Finally, we
conclude by providing directions for future research to further our understanding of the
judgments made by investors.

Keywords: investor judgments, construct validity, experimental design