Investor Judgments Research Articles

An Examination of the Effects of PCAOB Inspection Selection Method and Disclosure of Audit Strengths on Investor Judgments

SUMMARYThe PCAOB, in its inspection process, has historically focused on reporting audit deficiencies and used a risk-weighted selection method. In two experiments (focusing on a “micro” and a “macro” investment), we take a “what if” exploratory public policy perspective of evaluating the potential effects on investors' audit quality judgments and investment decisions of two evolving PCAOB inspection practices: disclosure of audit strengths and deficiencies, and the use of a random inspection selection method. In both experiments, we manipulate: inspection reporting (only deficiencies under the historical PCAOB inspection reporting; only deficiencies under a “balanced” PCAOB reporting; or a report where strengths are present but outnumbered by deficiencies) and inspection selection method (risk-weighted or random). We find that disclosure of audit strengths is highly relevant to investment decisions, through influencing investors' audit quality assessments and confidence in financial reporting. Investors also consider inspection selection method in macro-level, but not in micro-level judgments.

How Do Disclosure Repetition and Interactivity Influence Investors’ Judgments?

ABSTRACTRecent regulatory amendments aimed at modernizing disclosures and enhancing their usefulness focus on repetition and interactivity within firms’ disclosure filings. We use two experiments to provide evidence on the effects of disclosure repetition (repeating of information in the filing) and disclosure interactivity (user involvement in directing the form or content of the information displayed) on investors’ information processing and investment judgments. Results show that repetition increases investors’ processing of repeated information, consistent with the informational role of repetition documented in prior research. In contrast, repetition reduces investors’ processing of other, nonrepeated information when the filing is less interactive. This evidence corroborates concerns that repetition can obscure value‐relevant information from investors. However, we find that more interactive disclosures mitigate this harmful effect of repetition on investors’ processing of nonrepeated information. Further, more interactive disclosures lead to deeper overall processing of both repeated and nonrepeated information, rather than more interactive disclosures redirecting investors’ attention and processing away from repeated information. Thus, our evidence suggests that disclosure interactivity is an important disclosure attribute that counteracts the potentially harmful effects of repetition on investors' processing of nonrepeated information, while preserving repetition's informational role.

Trust in Numbers: Joint Effects of Management Earnings Guidance Quantification and Attribution Quantification on Investor Judgment

Trust in Numbers: Joint Effects of Management Earnings Guidance Quantification and Attribution Quantification on Investor Judgment

Research on the Application of Generative Adversarial Networks in the Generation of Stock Market Forecast Trend Images

Investors make capital investment by buying stocks and expect to get a certain income from the stock market. When buying stocks, they need to draw up investment plans based on various information such as stock market historical transaction data and related news data of listed companies and collect and analyze these data. The data are relatively cumbersome and require a lot of time and effort. If you only rely on subjective analysis, the reference factors are often not comprehensive enough. At the same time, Internet social media, such as the speech in stock forums, also affect the judgment and behavior of investors, and investor sentiment will have a positive or negative effect on the stock market. This has an impact on the trend of stock prices. Therefore, this article proposes a stock market prediction model that uses data preprocessing technology based on past stock market transaction data to establish a stock market prediction model, and secondly, an image description generation model based on a generative confrontation network is designed. The model includes a generator and a discriminator. A time-varying preattention mechanism is proposed in the generator. This mechanism allows each image feature to pay attention to the image features of other stock markets to predict stock market trends so that the decoder can better understand the relational information in the image. The discriminator is based on the recurrent neural network and considers the degree of matching between the input sentence and the 4 reference sentences and the image features. Experiments show that the accuracy of the model is higher than that of the stock pretrend forecast model based on historical data, which proves the effectiveness of the data used in this paper in the stock price trend forecast.

Auditing Non‐GAAP Measures: Signaling More Than Intended*

ABSTRACTMany companies regularly disclose non‐GAAP performance measures to communicate firm‐specific information that does not fit within the mold of GAAP reporting. However, these non‐GAAP measures may have low information content or even be misleading to investors. Thus, the question arises of whether auditors should play a larger role in the reporting of non‐GAAP measures, which currently are not audited. We run an experiment to provide ex ante evidence on the effect of auditing non‐GAAP measures. Specifically, we present investor‐participants with a non‐GAAP measure that should be used when making investment judgments (more informative) or should not be used when making investment judgments (less informative) and is either audited or is not audited. As predicted, we find that, when participants view a non‐GAAP measure that is more informative, they appropriately use the non‐GAAP measure in their investment‐related judgments, regardless of whether the measure is audited. However, also as predicted, we find that, while participants appropriately do not use a less informative non‐GAAP measure when it is not audited, participants inappropriately do use the less informative non‐GAAP measure in their investment‐related judgments when it is audited. Mediation results provide evidence consistent with audits affecting investors' reliance on non‐GAAP measures. Specifically, our results are consistent with audits of non‐GAAP measures signaling more than is intended, evidenced by investors perceiving an audited non‐GAAP measure as being useful in their investment decisions when the measure is less informative to them. Our findings suggest that regulators should exercise caution when it comes to prescribing assurance over non‐GAAP measures.

The Joint Influence of Information Push and Value Relevance on Investor Judgments and Market Efficiency

ABSTRACTWe use experimental markets to examine how pushing investment information and the value relevance of that information interact to influence investors’ value estimate accuracy and market price efficiency. Developments in technology allow information to be pushed to investors anytime and anywhere. However, in addition to value‐relevant information, pushed information often includes information that is irrelevant for assessing firm value. Drawing on psychology theory, we find that pushing information has divergent effects depending on the value relevance of the information. Pushing only value‐relevant information increases investors’ processing of the information and leads to more accurate value estimates and market prices than when not pushed. In contrast, pushing a mix of value‐relevant and value‐irrelevant information reduces investors’ processing of value‐relevant information, leading to less accurate value estimates and market prices due to poorer acquisition and integration of information than when not pushed or when only value‐relevant information is pushed. Collectively, our results reveal a dark side to push technologies, particularly with the growing presence of value‐irrelevant information.

The Impact of Continuous Transactions of the National Pension Service on the Investment Judgment of Individual Investors

본 연구의 목적은 국민연금의 연속 매매일 거래가 개인투자자의 투자판단에 영향을 미치는지를 분석하는 것이다. 본 연구는 금융감독원의 전자공시 시스템 오픈 API를 통해, Python Crawling 방식으로 자료를 확보하였다. 그리고 사건연구방법과 고정효과모형을 활용하여 데이터를 분석하였다. 연구결과 첫째, 사건연구에서 국민연금이 연속으로 매수거래를 할 때 시장의 누적 평균 비정상 수익률은 부(-)의 방향을 보임을 확인하였다. 둘째, 국민연금이 연속적으로 매도를 진행할 때 비정상 수익률은 정(+)의 방향을 보임을 확인하였다. 셋째, 회귀분석 결과 국민연금의 연속 매수거래는 개인투자자의 매수거래에 정(+)의 영향을 미치는 것으로 확인되었다. 본 연구의 시사점은 다음과 같다. 첫째, 국민연금은 시장이 하락할 때 반대로 매수하고, 시장이 상승할 때 반대로 매도하기 때문에 시장 안정화 역할을 한다고 볼 수 있다. 둘째, 개인투자자에게 국민연금의 연속 매수거래는 긍정적인 뉴스로 해석될 여지가 있다. 끝으로 국민연금의 연속거래에 관심을 보이는 투자자가 있으므로 연속거래 행태에 대하여 전략 노출 완화방안을 모색할 필요가 있다.

News Credibility and Influence within the Financial Markets

How does information credibility, a subjective judgment of investors, affect empirical asset pricing in financial markets? Traditional economic theories are inadequate for interpreting market responses driven by people’s subjective thinking, as these cognitive processes are not encompassed by the concept of utility. We explore these effects by using computational linguistics and deep structured learning algorithms to analyze financial newspapers and social media posts. After controlling for factors related to content and market momentum in our narrative based credibility indicator, we find that news credibility is positively correlated with the returns on assets preferred by experts and negatively correlated with assets preferred by gamblers. Based on this finding, we point out that the efficient-market hypothesis (EMH) is not appropriate in the dominant market of gamblers in the short-term. In the long-term, however, investment motivation does not significantly affect the validity of the hypothesis.

Evaluating company adoptions of blockchain technology: How do management and auditor communications affect nonprofessional investor judgments?

Blockchain, an advanced technology with immense capabilities, is disrupting industries and global commerce. Given blockchain’s complexity, investors will likely rely heavily upon information communicated by management and auditors to understand the risks and benefits of companies using blockchain. In this study, we experimentally investigate how management and auditor communications regarding a company’s use of advanced technology affects nonprofessional investor judgments. First, we investigate if these investors change their judgments depending upon whether management’s descriptions of the advanced technology in the 10-K specifically reference blockchain or not, as prior research suggests investors could react positively or negatively. We also examine whether the presence of a critical audit matter (CAM) related to the advanced technology interacts with specific blockchain references to affect investor judgments, as our theory predicts the combination of a blockchain reference and a technology-related CAM will prompt less investment. Absent a technology-related CAM, we find no evidence that blockchain references influence investor judgments. However, we find that when blockchain references accompany a technology-related CAM, investors indicate less investment. Altogether, these findings contribute to the literature by highlighting the interactive effect of management and auditor communications concerning advanced technologies, as these reporting choices affect the judgments and decision-making of nonprofessional investors.

The effect of boilerplate language on nonprofessional investors’ judgments

Most companies disclose risk factors using vague, boilerplate language. Regulators are concerned that this vagueness reduces the decision-usefulness of the information; hence, they are encouraging companies to be more specific rather than generic. However, little is known about the impact of specificity on investment judgments. The results of this experimental study suggest that regulators’ concern may be justified. Non-professional investors who read a generic disclosure react less strongly immediately after reading it than those who read a more specific disclosure when prior information about the disclosed risk factor is available in their memory immediately before reading the risk disclosure. In addition, on realisation of the risk, they are more surprised than their counterparts who read a more specific disclosure, and lower their credibility judgments accordingly. These investors correct their judgments after the risk realisation to a greater extent than those who have read a more specific disclosure. The study has implications for regulators, managers, non-professional investors and researchers.

Analisis Pengaruh Keputusan Investasi Mahasiswa

In Indonesia, the capital market experiences very rapid growth. The increase of the IDX Composite in 2016 was an indicator of capital market developments and affects investment activities. The investment activities related to the investment judgments of investors are affected by many factors. This study discusses the impact of financial literacy, herding behaviour, risk perception, overconfidence, experience regret, and the illusion of control on investment decisions. This study used 100 equity investors registered in an investment gallery at the Universitas Nusantara PGRI Kediri as samples. The analysis technique is SEM PLS. Results show that financial literacy, overconfidence, and illusion of control affect investment decisions. Besides, herding behaviour, risk perception, and experience regret do not influence investment decisions. The significance of these findings is to provide knowledge about the aspects and factors that influence investment decisions. Financial literacy allows investors to gain more information and learn about investments to avoid and prevent risks. Overconfidence gives investors sufficient certainty and information in making decisions by paying attention to the risks to prepare themselves to receive returns from the undertaken investments. The illusion of control makes investors believe in their abilities which can trigger investment results. Students with better financial knowledge can make better investment decisions.

The Effects of Company Image and Communication Platform Alignment on Investor Information Processing

ABSTRACTMotivated by firms' increasing use of new media technology for investor communications, we investigate how alignment between company image and communication platform affects investor judgment and decision making. In our first experiment, we demonstrate that investors expect alignment between firm image and the perception of the new media communication platform managers choose for investor relations. In a second experiment, we examine how this alignment affects investor judgment and decision making. We predict and find that greater platform-image alignment leads investors to experience subjective ease of processing, but does not change investment amounts. Additionally, we demonstrate an approach to conducting an explicit test of a null hypothesis by evaluating the convergence of null hypothesis significance testing (NHST) and Bayesian methods. Our findings have implications for researchers, firms, and investors, and add to a growing literature on new media disclosure.

Investigating the Effects of Disclosure of Non-Financial Intangible Information on Investors’ Judgment about Future Financial Performance of the Company

The present study aims to investigate the needs of users in connection with the information of intangible assets in current financial statements with an emphasis on the way of disclosing non-financial information. For this purpose, the effect of the two independent variables of causal links’ discussion and level of non-financial performance on the financial performance of the firm, as the dependent variable, has been studied. The research is applied in terms of its objective and it is a survey in terms of the research design. The research population includes PhD students of accounting in top-ranking universities of Iran. Statistical methods, including test ratio, single-sample t-test, independent t-test, and one-way and two-way variance analysis have been used to test hypotheses. The findings show that the disclosure of non-financial intangible information along with causal links does not affect the judgment of investors with a low or high level of knowledge. However, it should be noted that the recall of the performance in terms of non-financial criteria by investors, who have a causal link discussion, is higher than others.

Analysts’ EPS Forecasts: The Effects of Forecast Uncertainty and Forecast Precision on Investors’ Judgments of Forecast Reliability

I use controlled experiments to investigate the joint effects of forecast precision and forecast uncertainty on investor judgments. I find that forecast precision moderates the effects of forecast uncertainty on investors’ forecast reliability judgments such that the effects of forecast uncertainty on investors’ judgments of forecast reliability are more negative when an analyst’s point earnings per share (EPS) forecast is round than when it is precise. In addition, the relationship between forecast precision and investors’ judgments of forecast reliability is mediated by investors’ perceptions of analysts’ personal characteristics related to their forecasting ability. My evidence also suggests that while forecast uncertainty continues to exert a negative effect on investors’ investment judgments, forecast precision does not play a role in mitigating these negative effects. Using a supplementary within-participants experiment, I further find that investors may not be consciously aware of how forecast precision influences their judgments of forecast reliability. My findings are informative to analysts and investors because they provide insights into how investors perceive and react to rounding in analysts’ point EPS forecasts under differing levels of forecast uncertainty.

How Does SEC Review Correspondence Affect Investors' Judgments? The Role of Access Costs and Review Ambiguity

ABSTRACTReview correspondence between the SEC and firms is a potentially valuable resource for investors, revealing important information about firms' financial reporting quality. Research suggests that reducing access costs (i.e., the amount of effort required to access review correspondence) could increase investors' processing of this important information. Drawing on psychology theory, I predict and find that access costs interact with another key characteristic within the SEC's control—review ambiguity (i.e., transparency about outcomes from the SEC's review process)—to influence investors' judgments. Results show that when access costs are low, greater review ambiguity decreases investors' reliance on review correspondence information and influences investment judgments in a corresponding manner. In contrast, review ambiguity has no effect on investors' reliance or investment judgments when access costs are high. Overall, my results provide important new insights on the importance of SEC transparency during its review process, particularly as information becomes more easily accessible.JEL Classifications: C91; D81; D83; G11; M41.

Connecting the Dots: Helping Investors Use Risk Disclosures When Evaluating Financial Statements

The SEC and other policy makers continually seek to improve the decision-usefulness of firm risk factor disclosures. This study tests the impact of two related potential improvements on investor judgments. First, we test the SEC’s recent requirement of a two-page summary of risk factor disclosures, which was focused on increasing readability and reducing lengthy and boilerplate risk factor disclosures. Second, we propose and test hyperlinking risk factor disclosures to related financial statement line items. This proposal is based on theories from accounting and psychology that indicate such a change will facilitate greater causal coherence when evaluating financial statements. We test both potential improvements in an experiment with retail investors, and we find no evidence that the SEC's recent requirement impacts investor judgments. However, results show that hyperlinking significantly affects investor judgments. These findings question the effectiveness of the SEC's recent requirement and provide a new potential improvement for policy makers to consider.

Investor Judgments: Linking Dependent Measures to Constructs

Investor Judgments: Linking Dependent Measures to Constructs

CEO Gender and Responses to Shareholder Activism

Recent literature finds that firms led by female CEOs are more likely to be targeted by activist shareholders, and that female CEOs are more likely to cooperate with activist shareholders’ requests. Our study complements this literature by investigating how a CEO’s response to shareholder activism influences investors’ reactions, and whether reactions differ depending on the gender of the CEO. Using an experiment, we find that investors evaluate a firm as less attractive when a female CEO uses an uncooperative response rather than a cooperative response to shareholder activism. Alternatively, investors evaluate a firm as less attractive when a male CEO uses a cooperative response rather than an uncooperative response. Our results suggest that investors rely on gender stereotypes when evaluating the responses of male and female executives to shareholder activism, and that these evaluations affect their investment judgments. Our results also suggest a potential alternative explanation for the finding that female CEOs are more likely to cooperate with activist shareholders than male CEOs. Rather than inherent differences in the management style of male and female CEOs, responses may be driven, at least in part, by managers anticipating that they will be penalized by investors for deviating from gender-stereotypical behavior.

When and how do advertisements affect investors’ processing of online financial information?

We conduct three experiments that examine when and how advertisements affect investors’ processing of financial information in an online environment. Our first experiment investigates the effects of peripheral advertisements with benign content. We do not observe differences in investment judgments when such ads are present, and a follow up eye tracking study confirms that investors generally avoid looking at these types of ads. Our second experiment investigates the effects of advertisements when they are more difficult to distinguish from relevant content. We find that investors’ efforts to avoid advertisements result in lower recall of graphically presented financial information when advertisements that interrupt the relevant content are present. Our third experiment investigates peripheral advertisements with content that elicits a negative emotional response and finds that these ads affect investment judgments via their effects on investor mood and the perceived tone of nearby financial information. Overall, our findings suggest that investors successfully ignore benign peripheral advertisements, but other types of advertisements, such as intrusive or emotionally laden advertisements, affect investors’ processing of nearby financial information.

Does the EU Taxonomy for Green Investments affect Investor Judgment? An Experimental Study of Private and Professional German Investors

Does the EU Taxonomy for Green Investments affect Investor Judgment? An Experimental Study of Private and Professional German Investors