Valuation Judgments Research Articles

The influence of corporate philanthropic donations on private investors' valuation judgments: Experimental evidence

AbstractCorporate donations towards disaster relief efforts, often called corporate philanthropic disaster relief (CPDR), are commonplace practice and one critically observed subcategory of CSR, with high visibility in the global media. We investigate whether private investors value firms differently based on their perception of firm's engagement in CPDR. Therefore, we created an experimental investment scenario in which we manipulate the magnitude of a hypothetical Firm Y's CPDR efforts to evaluate investment decisions of private investors recruited from Amazon's Cloud Research platform. Our findings suggest that higher CPDR generally affects private investors' assessment of a firm's value positively. Using a structural equation model and the CSR skepticism concept to examine private investors motive attribution to firms' CPDR, we find that private investors perceive high CPDR as an indicator for honest and values‐driven corporate social behavior and a low CPDR as an ingratiating attempt to win favor. Thus, we extend prior research by unveiling through which channels of impact CPDR potentially affects firm value and find an explanation why CPDR can have adverse effects on firm value.

You have been forewarned! The effects of risk management disclosures and disclosure tone on investors’ judgments

We examine the effect of providing risk management disclosures alongside risk disclosures on investors' stock valuation judgments, and how risk disclosure tone influences this effect. In practice, risk management disclosures are mandated in some settings but not others although conceptually, disclosing both the risk and how it is managed offer investors the most holistic understanding of firm risk. We find that without risk materialization, risk management disclosures have a positive effect on judgments when the risk disclosure tone is positive. Also, investors provide lower (higher) stock valuations when a positive versus negative tone is used in the absence (presence) of risk management disclosures. However, with the negative news of risk materialization, risk management disclosures and tone no longer have an effect on investors’ judgments. Our findings have implications for managers and regulators, as investors may penalize firms that provide risk disclosures, even if these risks have been properly managed.

You Have Been Forewarned! The Effects of Risk Management Disclosures and Disclosure Tone on Investors’ Judgments

SEC risk disclosure standards require the standalone disclosure of risk factors and do not permit the concurrent disclosure of risk management information. This differs from requirements in regimes such as Germany. The SEC is considering mandating risk management disclosures. We experimentally examine how the disclosure of risk management information alongside risks and the risk disclosure tone used influence investors’ stock valuation judgments, with and without materialization of the disclosed risk. We find that without risk materialization, investors provide lower (higher) stock valuations when a positive versus negative disclosure tone is used in the absence (presence) of risk management disclosures. With risk materialization, a positive tone leads to lower stock valuations only in the presence of risk management disclosures. Our findings have implications for managers and regulators, as investors may penalize firms that make good faith risk disclosures, even if these risks have been properly managed.

The Effect of CSR Assurance and Explicit Assessment on Investor Valuation Judgments

SUMMARY We examine whether CSR assurance increases investors' fundamental value estimates, whether this effect depends on the type of assurance (reasonable versus limited), and whether investors are prompted to explicitly assess the company's performance. We conduct a 3 × 2 between-subjects experiment, with CSR assurance being manipulated at three levels (no assurance, limited assurance, and reasonable assurance) and explicit assessment at two levels (no explicit assessment and explicit assessment). We find that when there is no prompt to explicitly assess performance, the investors who receive an assurance report at a reasonable level derive higher fundamental value estimates than the investors who receive CSR information that is not assured or assured at a limited level. Investors who receive either a reasonable or limited assurance level report perceive the information to be more reliable than the investors who receive CSR information that is not assured, regardless of the prompt for explicit assessment.

Effects of Behavioural Uncertainties In Property Valuation

Psychological and behavioural dimensions play a vital role in influencing Valuers’ valuation judgements, thus affecting the validity, accuracy and discrepancy (reliability) of property values. However, behavioural uncertainty research, specifically within the discipline of property valuation among property Valuers, is still limited, particularly in developing countries with their unique property valuation systems, and has been so far conducted in an independent, separate manner, which looks into the behavioural uncertainties non-connectedly. Therefore, this study aims to examine the behavioural uncertainties of local Valuers in property valuation, vitally addressing the questions of behaviours involved and how a behavioural uncertainty is associated with other behavioural issues. This study adopted a phenomenological design, where a session of focus group discussions with 10 public-private Valuers from Johor Bahru, Malaysia was conducted. Results show that local Valuers were subject to various, simultaneous interwoven behavioural uncertainties, which ultimately form a behavioural framework of associations, including biases, client influences, heuristics, professional ethics, and opportunistic behaviours in making their valuation judgement. Biases (subjective preference) and professional ethics (negligence and carelessness) are the two most dominant behaviours involved in local property valuation. These findings provide policy insights to both public and private Valuers, academicians, and the market about the importance of understanding behavioural property economics, that crucially enables them to collectively create a sustainable property valuation environment.

New Definitions for the Notions “Asset” and “Liability” in the Conceptual Framework for Financial Reporting: Reasons and Consequences

The purpose of this article is to investigate the evolutionary logic of defining assets and liabilities under the influence of changes in the Conceptual Framework of Financial Reporting, the causes, and consequences of these changes in a consistent understanding by developers and practitioners.
 The evolutionary changes in the definitions of assets and liabilities in the Conceptual Framework of Financial Reporting and the reasons that led to these changes have been investigated. The reasons are different interpretations of probability and expected benefits; and asymmetric asset and liability identification. The expediency of interpreting an asset as a current economical resource that is controlled by an entity as a result of past events and the obligation as a current obligation of the entity to transfer an economic resource as a result of past events have been interpreted. Found different formulations of these interpretations encourage a rethinking of past practices and move towards the symmetry of assets and liabilities identification. The new criterion for defining obligatory such as “no practical ability to avoid” complicates the goal of changes because it requires the use of additional valuation judgments in practice.
 Understanding of the probability threshold before and after changes in asset and liabilities definitions has been examined. It was found that the old asset and liabilities definitions have no bearing on the judgment as to whether the asset existence. Participants use a higher probability threshold in assets recognition than in liabilities recognition.
 The implications of the changes for a consistent understanding between setters and practitioners have been identified. In particular, new changes in asset and liability definitions improve the implementation of the IASB goals and better align participants' judgments with setters’ intentions. It is established that IFRS is now sufficiently complete to cover virtually all transactions and events within the scope of the direct standard, although it does not exclude the need to use the Conceptual Framework not only by the standards setters but also by experts, auditors, lawyers, scholars and economic students on economic faculties.

The Influence of Firms' Emissions Management Strategy Disclosures on Investors' Valuation Judgments

ABSTRACTRecent accounting research indicates that capital markets price firms' greenhouse gas (GHG) emissions and that disclosed emissions levels are negatively associated with firms' market values. The departure point for this study is to investigate whether investors value firms differently based on the strategies firms use to mitigate GHG emissions. These strategies include making operational changes, which reduces emissions attributable to the firm, and purchasing offsets, which reduces emissions unattributable to the firm. Using an experiment, we hold constant a firm's financial performance, investment in emissions mitigation, and net emissions, and find evidence that nonprofessional investors perceive the firm to be more valuable when it primarily uses an operational change strategy versus an offsets strategy. However, consistent with theory, this result only occurs when the firm's prior sustainability performance is below the industry average and not when it is above the industry average. This difference in firm value is consistent with the notion that nonprofessional investors believe information about a firm's emissions management strategy is material. Supplemental exploratory analyses reveal that our results are mediated by investors' perception that an operational change strategy is more socially and environmentally responsible than an offsets strategy for below industry average firms. Implications for our findings on theory and practice are discussed.

The Effects of Experience and Client-Preferred Outcomes on Accountants' Complex Loss Valuation Judgments

ABSTRACTAccounting regulators, practitioners, and academics have all expressed concern that client preferences unduly influence accountants' judgment. This study builds on Ponemon (1995) by investigating the effects of client outcome preferences and experience levels on practicing forensic accountants' and auditors' complex loss valuation accounting judgments. Based on studies in motivated reasoning and accounting experience, we predict and find that experienced accountants have the capacity to ignore client-preferred outcomes when evaluating evidence. Specifically, when acting as an expert witness in a lawsuit involving a loss valuation dispute, forensic accountants and auditors both provide higher estimates of the plaintiff's damages when assuming the role of an expert retained by the plaintiff versus the court, unless participants possessed high experience. In addition, we find no difference in loss valuation judgments for practicing forensic accountants and auditors when both have high experience.

The combination of multiple affective experiences and their impact on valuation judgments

ABSTRACT People’s affective experiences can be influenced by multiple informational inputs. It remains unclear however how this occurs? In this paper, we investigate the construction of affective experiences dependent on the varying number of previously presented, affectively-charged, informational inputs. In addition, because affect is often used as a cue in judgment and decision-making, we probe whether the resulting affective experience is mapped onto people’s valuation judgments (how much people are willing-to-pay for target rewards and experiences). In three studies, we show that people’s overall affective experience is constructed by averaging the affect of the previously presented, affectively-charged inputs. Subsequently, we find that people rely on the resulting affective experience as a cue for their judgments, as willingness-to-pay valuations were predicted by the combined affective experience. We measured integral, expected, as well as momentary affect – using both self-report and physiological measures. We discuss the potential for studying further how multiple inputs change affect as well as the implications for judgment and decision making.

Ideas are cheap: When and why adults value labor over ideas.

What do people value about a creation: the idea behind it or the labor needed for its implementation? Recent developmental research suggests that children by the age of 6 begin to value ideas over labor. Yet, much less is known about whether adults similarly attribute a higher value to ideas and idea givers than to labor and idea executors. In seven studies (N = 1,463), we explored the relative valuation of ideas versus labor in adults, its mechanisms and boundary conditions. Participants learned about an idea giver and a laborer who collaborated to create a product and indicated who deserves ownership and monetary compensation for the product. Contrary to what has been reported for children, Studies 1a-1c found that participants valued the contribution of the laborer more than the contribution of the idea giver. This labor-valuation effect emerged even when participants themselves were idea givers (Study 1b), and it was replicated across different populations (including legal professionals, Study 1c) and contexts (e.g., art works and businesses, Study 2). Studies 3a and 3b established perceived effort as a central psychological process behind the labor-valuation effect. Finally, Study 4 extended the effect to the realm of praise and blame judgments, showing that laborers receive more praise for positive outcomes, but less blame for negative outcomes, relative to idea givers. The current findings may provide a useful framework for understanding the role of effort in lay people's valuation of ideas and labor, thereby bridging research on creativity, effort, and valuation judgments. (PsycINFO Database Record (c) 2019 APA, all rights reserved).

Automatic summarization of earnings releases: attributes and effects on investors’ judgments

Firms often include summaries with earnings releases. However, manager-generated summaries may be prone to strategic tone and content management, compared to the underlying disclosures they summarize. In contrast, computer algorithms can summarize text without human intervention and may provide useful summary information with less bias. We use multiple methods to provide evidence regarding the characteristics of algorithm-based summaries of earnings releases compared to those provided by managers. Results suggest that automatic summaries are generally less positively biased, often without sacrificing relevant information. We then conduct an experiment to test whether these differing attributes of automatic and management summaries affect individual investors’ judgments. We find that investors who receive an earnings release accompanied by an automatic summary arrive at more conservative (i.e., lower) valuation judgments and are more confident in those judgments. Overall, our results suggest that summaries affect investors’ judgments and that these effects differ for management and automatic summaries.

Uninformative Anchors Have Persistent Effects on Valuation Judgments

Anchoring effects influence a wide range of numeric judgments, including valuation judgments, such as willingness‐to‐pay (WTP). However, prior research has not established whether anchoring only temporarily distorts responses or exerts persistent influence on preferences. This article presents three incentive compatible experiments examining the long‐term effects of random anchoring on WTP. Study 1 evaluated the persistence of anchoring effects over long durations, and showed that the strength of the effect decayed but did not disappear completely even 8 weeks later. In Study 2, a random anchor significantly influenced WTP after one week, regardless of whether WTP was also elicited immediately following the anchoring procedure, showing that consistency motivations do not account for persistence of anchoring effects. Study 3 showed relatively low anchors resulted in more stable valuations, compared with participants who reported WTP with no anchoring procedure. Together with the pattern of decay over time in Study 1, this suggests that anchoring facilitates the “imprinting” of valuation judgments for later retrieval. These studies show that anchoring effects can lead to lasting changes in valuation judgments, providing the first demonstration of long‐term persistence of constructed preferences as a result of an uninformative and arbitrary manipulation.

Effect of Readability and Complexity on Naive Investors Decisions: An Experimental Study in an Emerging Economy

Purpose of this paper: The purpose of this paper is to investigate the impact of the readability and complexity levels of financial disclosures on naive investors’ willingness to invest and their stock valuation judgements. Design/methodology/approach: Two experiments were conducted during the study. The first experiment is a between subject experimental design and is conducted to investigate the impact of different readability levels (less readable Vs more readable) on naive investors’ investment The second experiment is a within subject experimental design and is conducted to test the impact of different complexity levels (more complex Vs less complex) on naive investors’ Non-parametric statistical tests were used to test the research hypotheses. Findings: The impact of readability level on investors’ comfort and willingness to invest was clear and significant in the case of more complex negative information (options case) as investors’ willingness to invest was lower in case of more readable negative information on options, but that was not the result in case of the less complex negative information (convertible bonds case). Readability levels affected investors’ stock valuation whether the information presented is less complex or more complex. Investors’ stock valuation was lower in case of less readable information than that in the case of more readable information. As for the impact of complexity, the results didn’t show significant impact of the complexity levels on the investors’ willingness to invest and their stock valuation. Research limitations/implications: This paper uses undergraduate students registered in the English section in the faculty of commerce of Alexandria University as a proxy for naive investors. Those students passed three courses of accounting and have basic knowledge in financial disclosures. Real investors were difficult to recruit as subjects for the experiment conducted. Social and Practical implications: The results of the study imply that different readability levels can have a significant impact on investors’ willingness to invest in case the information presented is more complex and their stock valuation, whether the information presented is less complex or more complex. What is original/value of paper? This paper is the first to examine the impact of readability and complexity separately. The paper contributes to the existing literature examining the readability and complexity of financial disclosures on investors’ decisions and judgements.

The Value Relevance of Managers' and Auditors' Disclosures About Material Measurement Uncertainty

ABSTRACT Regulators now require auditors to provide information about how they evaluate complex estimates. Because users encounter this auditor-provided information alongside management-provided information, we jointly examine the value relevance of these disclosures. We also examine whether visual cues in audit reports influence how nonprofessional investors use these disclosures. We find that disclosures from managers and auditors provide different value-relevant information about the same underlying issue. While users struggle to weight fully narrative auditor disclosures in their valuation judgments without corresponding management disclosures, visual cues facilitate their weighting of information about the audit. Specifically, users take increased price protection when auditor disclosures also include visual cues. However, consistent with market signaling theory, corresponding voluntary disclosures from management attenuate this price protection. This suggests management can mitigate negative valuation effects that may arise from auditor disclosures, and implies that visual cues in audit reports can prompt managers to increase disclosure transparency. Data Availability: Contact the authors.

Affective Boundaries of Scope Insensitivity

People can be surprisingly insensitive to quantities in valuation judgments — a phenomenon called scope insensitivity that is generally attributed to the operation of affective processes in judgment. Building on research showing that affect is inherently a decision-making system of the present, we propose that scope insensitivity is more likely to be observed in decisions that are psychologically proximate to the immediate self. Consistent with this proposition, results from seven experiments (and two replications) show that scope insensitivity is more prevalent in decisions that are temporally proximate, both prospectively (near future vs. distant future) and retrospectively (recent past vs. distant past), and in decisions that are psychologically proximate in terms of social or physical distance. In addition to clarifying the boundaries of the scope-insensitivity phenomenon, these findings help refine our understanding of the affective system of judgment. Specifically, the findings suggest that the affective system of judgment and decision making is not just a system of the present, it is more generally a system of the immediate self. Any form of distance from the immediate self (in time, social relation, or physical space) tends to attenuate the engagement of the overall affective system.

Affective Boundaries of Scope Insensitivity

People can be surprisingly insensitive to quantities in valuation judgments — a phenomenon called scope insensitivity that is generally attributed to the operation of affective processes in judgment. Building on research showing that affect is inherently a decision-making system of the present, we propose that scope insensitivity is more likely to be observed in decisions that are psychologically proximate to the immediate self. Consistent with this proposition, results from seven experiments (and two replications) show that scope insensitivity is more prevalent in decisions that are temporally proximate, both prospectively (near future vs. distant future) and retrospectively (recent past vs. distant past), and in decisions that are psychologically proximate in terms of social or physical distance. In addition to clarifying the boundaries of the scope-insensitivity phenomenon, these findings help refine our understanding of the affective system of judgment. Specifically, the findings suggest that the affective system of judgment and decision making is not just a system of the present, it is more generally a system of the immediate self. Any form of distance from the immediate self (in time, social relation, or physical space) tends to attenuate the engagement of the overall affective system.

The Impact of Cybersecurity Risk Management Examinations and Cybersecurity Incidents on Investor Perceptions

In response to increased cybersecurity risk and demand for information about organizations’ cybersecurity risk management programs, the American Institute of Certified Public Accountants (AICPA) recently released a cybersecurity risk management examination service. We examine the effect of how this attestation service is provisioned on investors’ perceptions and valuation judgments. We also examine how these effects differ depending on whether a subsequent cybersecurity incident has occurred. The results of our experiment show that joint provisioning has a negative effect on investors’ perceptions of independence, without a corresponding positive effect on perceptions of cybersecurity examination competence or audit competence. We also find that the effect of an incident on audit competence is significantly more negative for joint compared to separate provisioning. The results also show that cybersecurity examination quality attenuates the negative effect of an incident on investors’ willingness to invest. This study highlights important implications of how cybersecurity examinations are provisioned.

The Paradoxical Behavioral Effects of a Directional Goal on Investors' Risk Perceptions and Valuation Judgments

ABSTRACTMarket participants who evaluate risk often have a preference or goal for positive company performance. The authors test how such a directional goal affects risk perceptions and the relation between risk perceptions and assessments of value in an investment context. Compared with investors without directional goals—who, consistent with prior behavioral research, focus on negative aspects of risk—the authors find that those with directional goals assess risk as being more symmetric (i.e., they are less focused on downside risk). However, investors with directional goals are also less likely to consider risk when assessing value. Taken together, these results suggest that a directional goal reduces one behavioral effect identified in prior literature (the tendency to focus on downside risk), but creates another behavioral effect (ignoring risk in assessing value). The authors discuss implications for standard setters and regulators seeking to communicate risk information to market participants.

Disclaiming the Future: Investigating the Impact of Cautionary Disclaimers on Investor Judgments Before and After Experiencing Economic Loss

ABSTRACTWe examine how cautionary disclaimers about forward-looking statements affect investor judgments both before making an investment and after having suffered an investment loss. In our first experiment, a cautionary disclaimer appears to effectively communicate to nonprofessional investors that forward-looking statements may not be reliable, but we find little evidence that the disclaimer alters the extent to which forward-looking statements influence nonprofessional investors' valuation judgments. In our second experiment, we shift our focus to ex post judgments and find that the disclaimer influences the extent to which investors feel wronged and entitled to compensation after an investment loss, consistent with investors attending to the disclaimer and acting as if it were, ex ante, effective. Notably, investors continue to feel more wronged and entitled to financial compensation when available evidence suggests that management knowingly issued false or misleading forward-looking statements—even if disclaimed. Together, these results provide support for recent judicial efforts to erode the sweeping safe harbor provisions currently granted to companies.Data Availability: Contact the authors.

A Study of a Barometric Methodology for Assessing the Agricultural and Forestry Machine’s Seat Comfort

The agricultural operations carried out with machines, require the operator spends a substantial amount of hours in a seated position on a seats often not properly padded therefore the parts of the body in contact with the seat are subject to considerable stresses. In addition, the operator must not only control the task he has done but he must also continually monitor actively with a significant commitment to operate levers, buttons and steering. Therefore, the operator's body is subject to various twists carried out in dynamic conditions according to the crop processing to perform. The parts of the body in contact with the seat, in particular the buttocks and the back, receive continuously, at irregular intervals, and with different intensity, different mechanical stresses that are translated immediately in pressure to the them tissues. Often these compressions occur in a concentrated manner, especially if the body is skinny and therefore the pressures could immediately affect the comfort perceived by the operator and at a later time, if repeated by the same operator and with the same machine, they could degenerate into occupational diseases because of the possible an incidence on blood flow. The purpose of this paper is to propose a new methodology based on barometric mapping, to investigate how forces are applied to the back and buttocks while driving a tractor, under standardized test conditions. In particular, the experimental tests have been conducted on a smooth surface free of roughness which is the simplest movement a vehicle can do along a road, such as transporting a trailer. The data were collected through an acquisition system based on a carpet with small pressure sensors. It has been used a carpet of 1024 cells for the sitting and one for the backrest. Acquisitions between the two sides of the seat were synchronized and the tests were repeated five times in order to develop an adequate analysis. Statistical analysis was mainly aimed at verifying the variability among datasets in order to study the effect of the seat on the value recorded. The statistical analysis was mainly aimed at verifying the variability between the data sets to study the effect of the seat on the pressure value recorded. The results showed, for the observed correlations, this method based on pressure between the seat and the body is a good tool to help the valuation judgment of a seat.