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Estimate-related Sensitivity Disclosures and Investors’ Reliability Judgments
W. Brooke Elliott, University of Illinois at Urbana - Champaign
Kevin E. Jackson, University of Illinois at Urbana - Champaign
Steven D. Smith, University of Illinois at Urbana - Champaign
ABSTRACT. We examine how nonprofessional investors’ reliability judgments are influenced by disclosures that describe the sensitivity of financial statement items to changes in their underlying estimates. Our experiment holds constant the actual sensitivity of the asset (i.e., the relationship between the estimate and the asset value is constant), and varies only the parameter values that describe the sensitivity relationship. We find that sensitivity disclosures lead to convergence in investors reliability judgments. We also find a significant pattern of decreasing mean reliability judgments across the parameter conditions. Furthermore, we find that the effect of parameter values on reliability judgments is mediated by the number of alternative asset values investors consider as a result of observing sensitivity information. Additional evidence suggests that the effect of paramter values on investors' reliability judgments represents an unintentional cognitive effect.
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