An Examination of the Effects of Management Disclosure of Financial and Nonfinancial Information on Investors' Judgment and Decision-making

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Embargoed until 2020-08-01
Copyright: Ko, John
In recent years, investors have been increasingly incorporating nonfinancial performance information alongside financial performance information into their investment decision-making. While this has been a prevalent trend complemented by companies growing emphasis on reporting nonfinancial performance externally, research examining how investors evaluate and process nonfinancial performance remains surprisingly limited. Specifically, the current reporting setting is one where managers have discretion as to how they convey the relationships between nonfinancial and financial performance, both visually (such as through different presentation formats), and narratively (by explaining the causal relations between nonfinancial performance and financial performance). Given that investors have limited attention and use different information processing strategies contingent on key characteristics of the decision environment, in this dissertation, two experimental studies are conducted to examine how presentation formats and causal explanations affect investors information processing and judgments. Using eye-tracking technology, Study One examines whether performance information presented based on either stakeholders or strategic themes influences the information processing patterns of investors with directional investment preference. The results show that a stakeholder format causes investors in a long investment position to focus more (less) attention on evaluating negative financial (positive nonfinancial) information compared to investors in a short investment position. However, investment position makes no difference when the same information is presented in a strategic theme format. Moreover, faced with negative financial information, investors exert greater effort towards integrating the performance information when they are in a long (versus short) position or when the information is presented in a stakeholder (rather than a strategic theme) format. Study Two examines the effects of management s causal explanations of the relationships between nonfinancial and financial information and the direction of the causal explanations (either in a predictive or in a diagnostic manner) on investors evaluations and judgments. The results reveal that when a predictive causal explanation is presented, investors perceive management as less trustworthy, evaluate company earnings negatively and are less likely to invest in the company than when no causal explanations are presented. The findings of this dissertation have important implications for external reporting entities, standard setters and analysts.
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Ko, John
Cheng, Mandy
Chen, Wei
Green, Wendy
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PhD Doctorate
UNSW Faculty
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