Does causally linking nonfinancial measures influence investors' use of management’s disclosures of nonfinancial information?

Abstract

AbstractThis study experimentally examines the joint effect of causal linkages between nonfinancial measures (NFMs) and firm financial performance on investors’ reactions to management disclosures of nonfinancial information. Our findings suggest that causal linkages interact with financial performance to affect investors’ judgements and decisions. In particular, causally‐linked NFMs have a positive effect on investors’ investment decisions only when the financial performance of the company is favourable, but not when it is unfavourable. This positive effect of causal linkages is associated with investors’ enhanced perceptions on the future prospect of the disclosing company. Given that an increasing number of companies are integrating nonfinancial measures with financial measures in their annual reports and other communications, the findings of this study should be of interest to managers, regulators and standard setters who attempt to better understand the use of nonfinancial information by nonprofessional investors.