Nonprofessional Investors Research Articles

Exploring impression management through eye-tracking: A study on the influence of photographs in financial reporting

The objective of financial reporting is to provide decision-useful information for a wide range of existing and potential stakeholders. However, the lack of regulation regarding the use of visual imagery may enable companies to engage in impression management and subtly influence the reader’s judgments through careful selection of images and how they obfuscate or clarify information. This study utilizes eye-tracking technology to experimentally examine how non-explanatory photographs influence the performance judgments of non-professional investors comprising business students and auditors. Participants were exposed to an excerpt of the management summary of a fictitious company’s annual report. The findings suggest while a non-explanatory photograph attracts attention in a text-image combination, the information search process and performance-related judgments are free of influences from the photograph. This implies other photographic attributes, such as triggering emotional influences or providing explanatory information, may be more relevant for impression management in influencing judgments over attentional influences.

The impact of cybersecurity risk management strategy disclosure on investors’ judgments and decisions

In March 2022, the Securities and Exchange Commission (SEC) proposed the mandatory reporting of cybersecurity risk management policies for public companies. This study aims to explore the potential impact of cybersecurity risk management strategy disclosure on nonprofessional investors. Using a 4 x 1 between-participants experimental design, we examine whether nonprofessional investors’ perceptions and decisions differ between disclosed cybersecurity risk management strategies of self-assessment, self-assessment referencing the National Institute of Standards and Technology (NIST) framework, third-party assurance, and insurance. We find that nonprofessional investors’ willingness to invest is significantly higher for the insurance strategy compared to the third-party cybersecurity examination and self-assessment (without reference to NIST) strategies. Moderated mediation analysis reveals that investors’ perceptions of financial risk moderates the mediating effect of perceived cybersecurity risk management strategy effectiveness on the relation between cybersecurity risk management strategy and likelihood of investment. Our study contributes to regulators, practitioners, and stakeholders concerned about the potential impact of cybersecurity risk management strategy disclosures on nonprofessional investors.

Foreign portfolio investments and voting bias in the Eurovision Song Contest

We investigate the role played by the voting bias in the Eurovision Song Contest (ESC) in explaining international bilateral portfolio investments. Our analysis reveals that the voting bias in the ESC score significantly helps explain bilateral portfolio investments but only for non-professional investors, while no systematic effect is found for financial companies’ holdings. Our results undergo robustness checks related to changes in the voting system and to the inclusion of standard static indicators of cultural distance. Moreover, for non-professional investors, the effect of voting bias is larger for debt than for equities: it is consistent with an affinity/animosity bias directed to target foreign governments and then reflected in sovereign debt holdings. Our analysis highlights that financial decision making, especially for less sophisticated investors, may be driven not only by static economic and cultural proximity, but also by less predictable time-varying national subjective feelings.

Accounting statements in the investment strategies of retail investors

Subject. The article investigates accounting (financial) statements as a source of information for retail investors, and tools to analyze and evaluate the investment attractiveness of a company as a way to reduce the risk of inefficient investment. Objectives. We focus on identification of the place and role of accounting in investment strategies of retail non-professional investors seeking to improve their financial situation by investing in the shares of Russian and foreign companies. Methods. The study draws on general scientific principles of cognition, including the analysis of statistical information, induction, synthesis, etc. Results. The paper presents the results of a survey of retail non-professional investors with experience in investment activities. The responses of respondents involved in the survey on the basis of an electronic platform are presented in a tabular form. We demonstrated the advantages and disadvantages of using various sources of information. The study revealed the key factors of investment attractiveness that retail investors take into account when choosing optimal investment objects. Conclusions. The most competent investors use the tools of accounting analysis and investment attractiveness assessment to build an effective long-term investment strategy. In addition to accounting statements, investors consider some non-financial parameters, like company reputation, brand awareness, ESG rating, etc.

The Effect of Pure Audit Firms, Nonprovision of Nonaudit Services to Audit Clients, and a Statutory Fee Schedule on Audit Quality Perceptions

ABSTRACT An ongoing debate revolves around instruments for enhancing the audit quality perceptions of financial statements users. Therefore, we investigate two measures that lack empirical evidence, but could theoretically improve perceived audit quality. These are a nonprovision of NAS (either by pure audit firms, or a nonprovision of NAS to audit clients) and a statutory fee schedule. We conduct an experiment with German bankers and nonprofessional investors. The results indicate that a nonprovision of NAS to audit and to all clients (i.e., pure audit case) increases perceived audit quality only if the audit firm sets audit fees internally. Moreover, a statutory fee schedule only increases perceptions of audit quality in the case of a simultaneous provision of audit services and NAS. Consequently, instead of full-banning NAS, an alternative approach would be to introduce a statutory fee schedule that would still permit the provision of NAS while adhering to existing caps. JEL Classifications: M42; M48.

How graphical vividness and interactivity in non-financial presentations influence nonprofessional investors

We investigate how graphical vividness and interactivity in displays of non-financial information following poor financial performance affect the judgments of nonprofessional investors. Leveraging the Hamilton and Winchel (2019) model of dual-process theories of persuasion in financial reporting, we hypothesize and find that graphical vividness and interactivity jointly influence nonprofessional investors. Despite negative news in financial information, investors perceive a firm’s performance more positively when favorable non-financial information is presented more vividly and with a user interactivity function. Finally, contributing to theory, we find that effort positively mediates the effects of user interactivity on nonprofessional investors’ judgments and decisions. The results lend empirical support to the Hamilton and Winchel (2019) model of dual-process theories of persuasion in financial reporting and have implications for designers of investor relations websites, investor groups consuming this information, and regulators concerned about the need for standards in the presentation of non-financial information in annual reports.

The Proof Is in the Pudding: How Does Environmental, Social, and Governance Assurance Shape Non-Professional Investors’ Investment Preferences? Evidence from China

The Proof Is in the Pudding: How Does Environmental, Social, and Governance Assurance Shape Non-Professional Investors’ Investment Preferences? Evidence from China

Non-professional versus professional investors’ trust in financial analysts’ recommendations and influences on investments

PurposeThe paper aims to investigate differences in non-professional and professional stock investors’ trust in and tendency to follow financial analysts’ buy and sell recommendations.Design/methodology/approachOnline experiment conducted in Sweden in March 2022 comparing non-professional private investors (n = 80), professional investors (n = 33), and master students in finance (n = 28). Information was presented about four company stocks listed on the New York stock exchange. Two stocks were buy-recommended and two stocks sell-recommended by financial analysts. For one stock of each type, the recommendation was presented to participants. Dependent variables were predictions of the stock price after three months, ratings of confidence in the predictions and choices of holding, buying or selling the stock. Ratings were also made of the importance of presented stock-related information as well as trust in analysts’ skill and integrity.FindingsMore positive return predictions were made of buy-recommended than sell-recommended stocks. Non-professionals and to some degree finance students tended to trust financial analysts more than professional investors did and they were more influenced by the presentation of the buy recommendations. All groups made too optimistic return predictions, but the professionals were less confident in their predictions, more likely to sell the stocks and lost less on their investments.Originality/valueA new finding is that non-professional stock investors are more likely than professional stock investors to trust financial analysts and follow their recommendations. It suggests that financial analysts’ recommendations influence non-professional investors to take unmotivated investment risks. Non-professionals in the stock market should hence be advised to exercise more caution in following analysts’ recommendations.

Measures for enhancing auditor independence: Perceptions of spanish non-professional investors and auditors

Auditors fulfill a crucial societal role by increasing the credibility of financial reports, which requires that appropriate audit quality be provided and auditors are factually independent and perceived as such. So far, regulators and researchers have focused on a few measures for improving independence, namely the prohibition of non-audit services (NAS), audit firm and audit partner rotation, and joint audits. Despite these regulatory initiatives, accounting scandals still happen, and the independence of the auditors involved is questioned. Therefore, this explorative study aims to identify alternative measures that may strengthen auditor independence. Non-professional investors and auditors participated in a survey to identify promising independence-enhancing measures.Surprisingly, not only non-professional investors but also auditors support the implementation of many instruments. Non-professional investors rate measures related to oversight, controls, and sanctions as particularly useful. Likewise, auditors perceive measures for oversight and control as helpful but rank most sanctions lower than non-professional investors. They also support a stricter civil liability and rank some direct independence-improving measures as highly useful. Overall, the participants perceive a greater need for improving the independence of public interest entity (PIE) auditors.This explorative study widens the research horizon by adding alternative measures for improving independence in appearance. Thus, researchers may identify promising avenues for future research. Also, the paper is of interest to regulators and potentially helps in setting independence standards. Auditors and audit committees can identify opportunities for taking voluntary actions to ensure factual and perceived auditor independence.

Sludges against Ponzi schemes

Pyramid schemes are adapting to the digitalisation era and mimicking various organisations. The organisers of these schemes quite often appeal to such human qualities as greed and the desire to get rich quickly. Thus, it is becoming increasingly relevant to develop new methods for countering pyramid schemes taking into account modern realities and behavioural characteristics of an individual decisionmaker. The focus of the research is on selecting sludge tools to fight against digital pyramid schemes. Methodologically, the study relies on the concepts of behavioural economics, in particular, of the nudge theory (nudges vs sludges). The methods include brainstorming, focus groups. The evidence comes from primary qualitative research, in-depth interviews with both non-professional investors and experts in the field of financial market held in 2022. The analysis allowed defining the concept of sludge and present the types of sludge tools. The paper provides an original list of sludge tools as well as a set of practical tools to counter pyramid schemes, which, in particular, consists of legal restrictions, monitoring of Ponzi schemes’ activities, financial enlightenment, a legal information system, self-coordination of investors, and an individual approach. The paper concludes that sludge tools differ in terms of the length of impact and the speed of obtaining a result. Short-term sludges generate a fast effect and prevent from investing in pyramid schemes without preliminary preparation of participants; they, for instance, include placing a poster with a warning against Ponzi schemes, ensuring a careful reading of the contract, mandatory familiarisation with the List of entities with detected signs of illegal activities in the financial market created by the Bank of Russia, taking a risk test for assessing the probability of a decreased price or lost asset, ensuring advice of a financial counsellor as an obligatory stage of investment. The findings contribute to the understanding of the need for proactive (preventive) measures’ development aimed at countering fraudulent schemes.

Audit firm tenure disclosure and nonprofessional investors' perceptions of auditor independence: The mitigating effect of partner rotation disclosure

AbstractIn 2017, the PCAOB began requiring audit firm tenure disclosure within the audit report for SEC registrant clients. Many commenters raised the concern that prominent disclosure of firm tenure would lead investors to inappropriately infer a negative relation between audit quality and long tenure. This is particularly troubling given that empirical evidence generally does not support this concern. In our first experiment, we predict and find that disclosing an audit firm's long tenure within the audit report increases investors' perceptions that the audit firm's independence was impaired while conducting the audit. However, we also identify an intervention that mitigates the effects of disclosing long tenure—an accompanying disclosure in the audit report of the firm's adherence to the SEC's mandatory partner rotation requirement. We find that such a disclosure moderates the effect of long tenure disclosure such that in the absence (presence) of a partner rotation disclosure, investors do (do not) perceive increased independence impairment when long firm tenure is disclosed. In a second experiment, we predict and find that long firm tenure disclosure reduces investors' preference to invest in an otherwise quantitatively optimal investment and that this relation is driven, in part, by perceptions of independence impairment. Again, this result is attenuated by partner rotation disclosure. Our results should be useful to regulators in understanding the effects of their disclosure mandate and to audit firms in understanding a practical way in which they might mitigate the implications of such effects.

Leveraging Emerging Cybersecurity Reporting Regulations: The Effect of Industry Driven Expectations for Voluntary Assurance

SYNOPSIS As the associated costs, business impacts, and high variability of cybersecurity disclosures capture the attention of regulators, we are witnessing a rapid emergence of proposals for new reporting requirements, such as recent SEC proposed disclosure guidelines and legislation being passed in both the EU and U.S. Within the context of cyber-breach disclosure, this study investigates how voluntary assurance provided by professional accounting firms affects nonprofessional investors’ judgments and decisions after the disclosure of a cybersecurity breach—an inevitable event. The study also examines how value relevance of voluntary assurance is altered when having such assurance is expected/unexpected given the company’s industry. We find expectancy violations, based on industry norms and investors’ perceived benefits of voluntary assurance, significantly influence investors’ judgments. This study begins to address questions on whether demand exists for voluntary assurance provided by professional accounting firms, particularly given lingering concerns over the viability of new forms of assurance. Data Availability: Data are available from the authors upon request. JEL Classifications: M41; M42; O31; O33.

The impact of key audit matters on goodwill accounting and investment behavior: Evidence from China

This study investigates whether key audit matters (KAMs) in audit reports impact accounting for goodwill impairment and investors' decision-making. Using a matching-based difference-in-difference estimator, this study finds that small audit firms fail to compel managers to promptly impair goodwill but cause further price distortion from goodwill inflation under the KAM reporting model. Additionally, negative press coverage improves the effectiveness of KAMs disclosed by small audit firms in goodwill accounting. Finally, KAMs disclosed by small audit firms will only mislead non-professional investors. This study extends the existing research on the association between audit reports, specific reporting quality, and resource allocation in the capital market.

Earnings predictability or truthfulness? Which one investors care more about

Purpose This study aims to investigate the impact of earnings predictability and truthfulness on nonprofessional investors’ investment willingness. Design/methodology/approach Earnings predictability is captured by quarterly earnings autocorrelation, and earnings truthfulness is indicated by real earnings management (REM). The average of investment attractiveness and willingness measures investment willingness. The authors use experiments to isolate the impact of quarterly earnings autocorrelation and REM on investors’ investment behaviors. Findings From the 2 × 2 design, the authors observe that investors weight more on earnings predictability than earnings truthfulness. Research limitations/implications The generalization of the findings may be constrained for the following reasons. First, the authors use only one proxy, REM, to measure earnings truthfulness. In addition, the authors provide the participants, Amazon Mechanical Turk, with earnings predictability. Results may no longer hold if each participant has different understanding and analysis of earnings predictability. Practical implications In periods of unprecedented and severe financial uncertainty (i.e. the COVID-19 pandemic), investors rely more on earnings predictability than on earnings truthfulness. The study assists managers to strategically emphasize the predictability of earnings to attract investors, especially when firms face financial challenges or uncertainty. Social implications This study contributes to understanding investor behavior and the critical role of earnings predictability and truthfulness in shaping investment decisions. Originality/value This paper contributes to the literature of earnings properties in financial reporting, particularly by shedding light on the nuanced interplay between earnings predictability and earnings truthfulness. The research also demonstrates that elevated earnings autocorrelation indirectly stimulates investment willingness by enhancing the investors’ perception of earnings persistence of targeted firms.

Decoding the success of equity crowdfunding: investment decisions of professional and non-professional investors

Decoding the success of equity crowdfunding: investment decisions of professional and non-professional investors

Algorithm aversion, emotions, and investor reaction: Does disclosing the use of AI influence investment decisions?

Businesses are increasingly using artificial intelligence (AI) in accounting systems to reduce uncertainty and improve accuracy. However, algorithm aversion (Dietvorst et al., 2015) indicates that individuals often avoid information provided by automated systems as compared to that provided by humans. This paper is an exploratory step towards documenting an emotional response to AI. We experimentally investigate how disclosing the use of AI rather than human staff for estimating the fair value of an asset influences investment decisions through lower levels of emotional response, particularly in pleasantness and attentiveness. Consistent with algorithm aversion, we find that disclosing the use of AI to estimate the asset’s fair value reduces the effect of information valence on nonprofessional investor responses. Specifically, when a company’s AI usage is disclosed, investors make smaller additional investments when fair value information is positive and smaller investment withdrawals when fair value information is negative, as compared to when human staff usage is disclosed. Importantly, we also find that emotions mediate the effect of information source (AI versus human staff) and moderate the effect of information valence on investment decisions.

Cognitive biases in the behavior of nonprofessional investor

Cognitive biases in the behavior of nonprofessional investor

Optimal stock allocation for an automated portfolio recommender system in the perspective of maximum fund utilization

“Buying or selling” a favorable combination of stocks is always challenging for non-professional investors due to its inherent complex and dynamic nature. Creating an automated Portfolio Recommender System (RS) for investors, has been an active area of research. The reliable performance of a portfolio depends on several complex factors, namely market fluctuations, market, and investors’ behavioral patterns, customers’ demographic classification, etc. In addition, the inter-relationship between the stocks needs more investigation along with the return and associated risk for the proper selection of a portfolio. In this work, the daily closing prices and volume of 297 Indian stocks from Large, Mid, and Small Cap categories from different sectors in the National Stock Exchange (NSE) of India for the FY 2021–22 have been considered. The set of dissimilar stocks has been extracted through K-means clustering using several additional parameters, namely, beta factor and proportionate volume, along with the traditional concepts of expected return and associated risk to create sample portfolios. Subsequently, the standard portfolios from the samples have been constructed utilizing Markowitz’s Modern Portfolio Theory (MPT) with a trade-off between expected return and associated risk. Next, for the purpose of comparing the maximum utilization of the investment amount, the greedy algorithm, as well as the integer programming problem, have been applied to different investment options. The associated numbers of discrete stock allocations have been obtained accordingly. The comparison shows that the greedy algorithm performs better than integer programming problem from the perspective of maximum fund utilization. The performance validation confirms that the MPT model is better than the Hierarchical Risk Parity (HRP) model, even in a period of market crisis. Finally, on the basis of different portfolio indices, the standard portfolios and other similar portfolios using the cosine similarity approach are recommended in accordance with investors’ choice.

EFFECT OF INTEGRATED REPORTING AND ENVIRONMENTAL REPUTATION ON COMPREHENSIVE DECISION-MAKING NON-PROFESSIONAL INVESTORS

This study is to examine the effect of integrated reporting and environmental reputation on the comprehensive decision-making by non-professional investors. Specifically, this study examines the process investors use to make comprehensive decisions (i.e. acquisition, evaluation, weighting, and judgment) when seeing information about companies’ integrated reporting and environmental reputations. We use a web-based experiment, or 2x3 between-subjects design, to investigate whether companies’ integrated reporting and environmental reputations have any influence on non-professional investors’ comprehensive decision making. 157 participant randomly selected students to serve as surrogate investors in this experiment. The data obtained were then tested using ANOVA and followed by a post hoc test. The findings show that companies that provide integrated reporting and have an environmental reputation make it easier for non-professional investors to make comprehensive decisions. Research on integrated reporting is scarce. There has been some research on the relationship between integrated reporting and investment decision making, but the environmental reputation of the relationship between integrated reporting and investment decisions has not been extensively explored. In fact, environmental issues are global issues. Furthermore, we argue that this research is very important to be carried out in Indonesia, considering that the arrangements regarding the presentation of various information can be carried out in an integrated or separate manner. This study can provide suggestions for regulators about the importance of regulations regarding the obligation to present financial and non-financial information in an integrated manner.

Nonprofessional Investor Judgments: Linking Dependent Measures to Constructs

ABSTRACTThere is limited evidence on the construct validity of the dependent measures commonly used in the literature on nonprofessional investor judgments. In this paper, we first survey the literature to understand the types of dependent measures typically used by researchers. We then conduct factor analyses to uncover linkages between dependent measures and the constructs underlying these nonprofessional investor judgments. Our results suggest that, while the wide variety of dependent measures can appear on their face to represent many nuanced economic constructs, these measures capture three distinct factors. These factors relate to nonprofessional investors’ (1) expectations regarding future firm performance and value, (2) holistic perceptions of the firm, and (3) evaluations of the risk associated with investing in the firm. Next, we provide recommendations for selecting, analyzing, and reporting dependent measures in future research. Finally, we provide directions for future research to further our understanding of the judgments made by investors.