Understanding investors’ reliance on disclosures of nonfinancial information and mitigating mechanisms for underreliance

Abstract

This study uses two experiments to examine whether nonprofessional investors rely on voluntarily disclosed nonfinancial information (NFI) and the factors that affect their reliance on such information. Results from experiment one suggest that nonfinancial disclosure affects high-experience (long-term) investors more than low-experience (short-term) investors. In addition, more investing experience seems to compensate the insensitivity to NFI caused by a short-term investment horizon. Results from experiment two suggest that merely requiring participants to evaluate firms’ performance separately based on the financial and nonfinancial measures (NFMs) – or merely presenting the NFMs in a more readable format – does not significantly alter the reliance on the nonfinancial disclosure for low-experience and short-term investors. However, when the two interventions are implemented simultaneously, NFI significantly affects the amount invested by those investors.