An Experimental Investigation of Forward-Looking Non-Financial Performance Disclosures

56 Pages Posted: 31 Jan 1998

See all articles by J. Richard Dietrich

J. Richard Dietrich

Ohio State University

Steven J. Kachelmeier

University of Texas at Austin

Don N. Kleinmuntz

affiliation not provided to SSRN

Thomas J. Linsmeier

Financial Accounting Standards Board

Date Written: December 1997

Abstract

The AICPA's Special Committee on Financial Reporting has urged disclosure of relevant forward-looking and non-financial information to supplement conventional financial statements. We conduct an experiment consisting of 20 laboratory security markets with eight participants each to assess the effects of such disclosures on capital allocation decisions. We observe four markets in each of five accounting information conditions: a baseline condition with an income statement and balance sheet only and four conditions that combine this baseline with supplemental disclosures of proved reserves (a best estimate), total reserves (an upper bound), and minimum reserves (a lower bound). We find first that proved reserve disclosures improve capital allocation decisions, even though these disclosures are redundant with information in the primary financial statements. Second, disclosures of the upper bound (total reserves) in the absence of lower bound (minimum reserves) has the potential to bias security prices upwards, while disclosures of both total and minimum reserves remove this bias. Third, a comparison of individual price predictions to actual market prices reveals both a systematic prediction error and a differential effect of supplemental disclosures on security prices, suggesting that experimental investigations of capital allocation decisions should include market settings. The paper concludes with a discussion of implications for accounting standard setters.

JEL Classification: M41, M45

Suggested Citation

Dietrich, J. Richard and Kachelmeier, Steven J. and Kleinmuntz, Don N. and Linsmeier, Thomas J., An Experimental Investigation of Forward-Looking Non-Financial Performance Disclosures (December 1997). Available at SSRN: https://ssrn.com/abstract=56240 or http://dx.doi.org/10.2139/ssrn.56240

J. Richard Dietrich

Ohio State University ( email )

2100 Neil Avenue
Dept of Accounting & MIS
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(614) 292-2118 (Fax)

Steven J. Kachelmeier

University of Texas at Austin ( email )

Department of Accounting
2110 Speedway, Mail Stop B6400
Austin, TX 78712
United States
512-471-3517 (Phone)
512-471-3904 (Fax)

Don N. Kleinmuntz

affiliation not provided to SSRN

Thomas J. Linsmeier (Contact Author)

Financial Accounting Standards Board ( email )

401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
United States
203-956-5208 (Phone)
203-847-6030 (Fax)

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