Experimental tests of the salience theory: disaggregated income statements under two economic states

Abstract

We present experimental evidence that unsophisticated investors are better able to make judgments when operating expenses are disaggregated by nature. Disaggregated expenses on the face of income statements increase the salience of information about cost structures and operating leverages that usually disclosed in several parts of the financial statements and notes. The judgments are also affected by economic states. We infer that disaggregation contributes more on making judgments in economic expansion rather than in economic recession. Our results bring empirical evidence to joint FASB/IASB financial statement presentation project and standard setters to encourage consistent principles for the presentation format in financial statements between Chinese GAAP and IFRS.