An investigation of factors impacting managers’ continuous disclosure judgements

Abstract

This dissertation explores companies' continuous disclosure ('CD') practices and examines factors impacting managers' CD judgements. CD judgements involve assessing whether a reasonable person would expect the information to have a material effect on the price or value of a company's securities. The concept of what judgements a reasonable person would make is important in both accounting and auditing standards across a range of countries. Regulators have also expressed concerns that practitioners are making too many materiality judgements without a full consideration of how a reasonable investor would evaluate the information (Pozen 2008).

This dissertation reports on two studies examining factors influencing managers CD decision making processes and judgements. Study One interviews managers to explore the specific internal disclosure structures used by managers to make CD judgements, and to identify key variables impacting their CD judgements. Study Two, a behavioural experiment, examines whether asking managers to take the decision making perspective of a reasonable investor increases their tendency to disclose a probable negative change in their company's earnings expectations, and whether managers' decision making perspective is moderated by knowledge of their boards' prior disclosure preferences to not disclose.

Study One revealed that managers answer to a variety of implicit and explicit accountability relationships which influence their CD behaviour, and that managers do not fully consider the viewpoint of a reasonable person when making CD judgements. Rather, in more subjective CD contexts, they rely on the board's disclosure preference, their own preferences or the company's CD precedents.

Study Two drew on the results of Study One to investigate whether decision making perspective and the board's disclosure preference affects managers' evidence evaluations and disclosure judgements. Two types of decision making perspective were examined; a self perspective, and a reasonable investor perspective. The board's preference was either known or unknown. Hypotheses were developed based on motivated reasoning theory. Results revealed that managers taking the perspective of a reasonable investor are more likely to recommend disclosure and this effect is stronger when the board's preference is unknown than known.