Does Estimation Uncertainty Affect Investors’ Preference for the Form of Financial Statement Presentation?

Abstract

The uncertainty underlying transactions and estimates, and how it is communicated in financial statements, is of increasing concern to financial statement users, preparers, standard setters, and auditors. In this study we examine how the underlying uncertainty of financial statement information influences well-informed investors’ preference for point versus range presentation and for the width of the estimated range. Consistent with congruity theory (Budescu and Wallsten, 1995), which states that individuals prefer the form of communication that best correlates to the inherent precision or uncertainty of the information communicated, we find that as uncertainty increases, investors prefer that financial statement information be presented as a range rather than a point estimate. We find that preferences among point, narrow-range and wide-range estimate forms depend more on the level of underlying uncertainty for financial statement information than the previous literature reports for management forecasts. We also find that investors deem ranges to be more accurate, credible and informative than point estimates, especially in situations of high uncertainty. These findings provide regulators with a clearer idea of how investors view uncertainty and the form in which they prefer uncertain financial statement information to be communicated.