The influence of information presentation order and evaluation time horizon on the outcome effect

The outcome effect occurs when an evaluation is influenced by knowledge of the outcome, even when it is unclear that the outcome provides additional information about the evaluatee's performance. This phenomenon has received considerable attention in the accounting and psychology literatures, which rely on cognitive or motivational factors to account for the outcome effect. However, prior research has not considered the impact of information presentation order or the evaluation time horizon. We evaluate prior research in accounting and conclude that information presentation order could have significantly impacted the outcome effect observed in these studies. We then report the results of an experiment that provides evidence that information presentation order plays a significant role in the existence and magnitude of the outcome effect. In addition, we find that the length of the evaluation time horizon is positively related to the magnitude of the outcome effect when conditions favor a recency effect.     

Primacy in stock market participation: the effect of initial returns on market re-entry decisions

We examine whether initial returns influence investors’ decisions to return to the stock market following withdrawal. Using a survival analysis technique to estimate Finnish retail investors’ likelihood of stock market re-entry reveals that investors who experience lower initial returns are less likely to return, even after controlling for returns in the last month and average monthly returns for the duration of investing. This primacy effect is robust to accounting for endogeneity in investors’ exit decisions, and other behavioural biases such as recency and saliency of investment experience. Individual investors appear to be subject to primacy bias and tend to put a significant weight on initial experiences in re-entry decisions.     

The Effects of Key Audit Matters on the Auditor’s Report’s Communicative Value: Experimental Evidence from Investment Professionals and Non-professional Investors

Abstract

We investigate the effect of key audit matters (KAM) in the auditor’s report as required by the new ISA 701. We consider investment professionals and non-professional investors in our experiments, in which we test the communicative value of a KAM section relating to goodwill impairment. Our main results show that in the condition in which the KAM section suggests that already small changes in the key assumptions could eventually lead to a goodwill impairment (KAM negative condition), investment professionals assess the economic situation of the company to be significantly better as compared to the condition in which the KAM section suggests that only large changes in the key assumptions could eventually lead to a goodwill impairment (KAM positive condition). In the additional analysis with non-professional investors, we find that a KAM section has no communicative value, implying that non-professional investors have difficulties with processing the information conveyed with KAM.     

When it pays to be a friend: Investigating nonprofessional investors' judgments toward CSR companies following an accounting restatement

Prior literature suggests that engagement in corporate social responsibility (CSR) creates an insurance effect that shields companies from the negative consequences of corporate missteps. We experimentally examine whether this protection extends to an accounting restatement and whether investors' attributions of the underlying reasons for this restatement affect their judgments. Results indicate that when a restatement occurs, non-professional investors evaluate high-performing CSR companies more favorably than their average-performing peers, but only when the misstatement appears unintentional. We also incorporate the Stereotype Content Model to test whether feelings of warmth and competence toward the company affect non-professional investor judgments. We document that absent a restatement, feelings of warmth mediate the relationship between CSR performance and investor judgments through competence. Following a misstatement, however, warmth directly mediates that relationship. Our results provide insights into specific psychological mechanisms and boundary conditions of the previously documented insurance effect of CSR performance.     

Availability,recency, and sophistication in the repurchasing behavior of retail investors

When determining a stock to buy, Strahilevitz et al. (2011) demonstrate that individual investors often repurchase a stock previously traded for a profit as a learning process. When evaluating a decision, people use the most available information that comes to mind. We posit that the most recently sold stocks are the most salient. Our analysis reveals that the presence of another more recently sold stock decreases a household’s propensity to repurchase a different stock by 23%. This recency effect dominates the impact of prior profitability on the repurchasing decision. The repurchase activity of investors appears to be sub-optimal, partially due to commission costs and under-diversification of portfolios, which is magnified for households repurchasing at higher frequencies. More sophisticated investors demonstrate less of this behavior.     

The effects of the method used to present a complex item on the face of a financial statement on nonprofessional investors' judgments

Our study is motivated by standard setters' (FASB, 2010; IASB, 2010a) interest in better understanding the effects of item complexity and disaggregation of financial information on users' decision processes. We examine whether the method used to present a complex item on a financial statement influences nonprofessional investors' judgments. We also examine whether disaggregation influences how different levels of item complexity are associated with judgments. Using a 2 × 2 between-subjects experiment, we manipulate variables representing presentation method (disaggregation versus aggregation) and level of item complexity (which is defined pension cost with high versus low volatility). With a sample of 114 nonprofessional investors, we find that when the complex item defined pension cost is disaggregated into its component parts and displayed in different sections of the statement of comprehensive income, nonprofessional investors acquire more information about the item and are able to more accurately understand the function of the item. This, in turn, helps the nonprofessional investors decide whether the information is useful in certain judgments. Additionally, we find that when a complex item is disaggregated, nonprofessional investors place even greater weight on their perceptions of level of item complexity in certain judgments. The results of this study are of value to managers, standard setters, and investors. For instance, results suggest that disaggregating a complex item across a financial statement can help nonprofessional investors learn how the component(s) driving a complex item relates to different economic events, improving their ability to understand and process the information in their judgments.     

行为模型新解及其实证检验

在以信息逐步扩散和投资者有限理性为主要假设的行为模型中,特定信息交易者和市场信息交易者的比例对股价行为有着重要影响：当特定信息交易者占多数时,个股收益更容易呈现正自相关;当市场信息交易者占多数时,个股收益更容易呈现负自相关。该模型可以解释成熟股市中存在基于总收益的动量效应,而中国股市中不存在基于总收益的动量效应,仅存在基于公司特定收益的动量效应;并解释了市场平均收益呈现负自相关等。另外,实证分析支持了传统的CAPM和APT定价模型中的带越小,动量效应越显著的结论。     

The impact of tagging qualitative financial information on investor decision making: Implications for XBRL

This study extends prior research by investigating whether investors benefit from tagging complex narrative disclosures. We examine how tagging facilitates professional and nonprofessional investors' acquisition and assimilation of narrative disclosures in assessing company risk and predicting future performance. Participants were randomly assigned to a standard or tagged presentation of Management's Discussion and Analysis (MD&A), the U.S. equivalent to Management's Commentary. The two versions contain identical overall information. The standard version works similar to a PDF file where the user can access sections of the MD&A by selecting titled sections. The tagged version uses an extended hierarchical structure proposed for the MD&A and as a conceptual foundation for developing a related XBRL taxonomy. As theorized, results indicate that nonprofessional investors use a more directive search strategy under the tagged condition while professional investors' search strategies are unaffected by the tagged condition. Saliency of risk information increases for both investor groups in the tagged condition (i.e., risk assessments and stock price predictions are more associated). Our findings have important implications in light of the U.S. SEC's decision to preclude inclusion of XBRL-tagged MD&A information in mandatory filings due to taxonomy limitations.     

How understandable are SOX 404 auditors reports?

This study experimentally examines potential non-professional investors’ understanding of a random sample of SOX 404 reports containing both IT weaknesses (ITWs) and non-IT weaknesses (non-ITWs) as reflected in their internal control weakness (ICW) severity ratings and their accuracy in identifying the reported ICWs. We find that the number of perceived non-ITWs and report length are positively associated with potential investors’ ICW severity ratings and that failing to perceive non-ITWs reduces potential investors’ ratings of weakness severity. However, the number of perceived ITWs is not associated with potential non-professional investors’ ratings of the overall severity of ICWs. Potential investors’ errors in identifying both non-ITWs and ITWs are associated with the number of non-ITWs and ITWs reported. Also, errors are positively associated with lower readability of SOX 404 reports. We identify specific types of ITWs and non-ITWs that contribute the most to the total number of errors made by non-professional investors in perceiving ICWs.     

Report format and the decision maker's task: An experimental investigation

This paper describes an experiment investigating whether the most appropriate report format is a function of the information needed by the decision maker. The latter is a task characteristic which can be described in terms of the question to be answered with an information presentation. Thirty MBA students were asked to answer a set of questions with financial information presented in four forms: line graph, bar chart, pie chart, and table. The results indicate that the question to be answered and the forms of presentation interactively effect performance, and that no one form of presentation is best in all situations.     

Ultra-high-frequency lead–lag relationship and information arrival

To our knowledge, this paper is the first study on the effect of information arrival on the lead–lag relationship amongst related spot instruments. Based on a large data-set of ultra-high-frequency transaction prices time-stamped to the millisecond of the S&P500 index and its two most liquid tracking ETFs, we find that their lead–lag relationship is affected by the rate of information arrival whose proxy is the unexpected trading volume of these instruments. Specifically, when information arrives, the leadership of the leading instrument may strengthen or weaken depending on whether the leading or lagging instrument responds to that information. An increase in the unexpected volume of the leader strengthens its leadership whereas an increase in the unexpected volume of the lagger weakens this leadership. In addition to the strength of leadership, an increase in the unexpected volume in response to information arrival may also have opposite effects on the lead–lag correlation coefficient depending on whether that volume increase belongs to the leader or the lagger. Finally, we find that sophisticated investors have a more significant effect on the lead–lag relationship than non-sophisticated ones.     

Auditor rotation and the appearance of independence: Evidence from non-professional investors

We examine the impact of audit firm versus partner rotation on non-professional investors’ independence-related perceptions, extending prior research on auditor rotation and independence in fact. Arguments for mandatory audit firm rotation continue to be made by regulators and investor groups based, in part, on the idea that firm rotation will incrementally strengthen independence in appearance relative to audit partner rotation. We report the results of two experiments. The first examines 5-year audit firm versus partner rotation under relatively weak or strong audit committees. We find no statistically significant difference in beliefs about how much of an income reducing audit difference management will record, or in beliefs about auditor independence, between the two auditor rotation conditions. On the other hand, we find that non-professional investors do believe more of the audit difference will be recorded, and the auditors will be more independent, under a strong audit committee than a relatively weak audit committee. The second experiment provides further evidence on audit firm versus partner rotation by examining a setting involving a 26-year audit firm–client relationship. Again, no statistically significant differences between the two auditor rotation conditions were found. These findings suggest that compared to audit partner rotation, audit firm rotation does not strengthen independence in appearance among non-professional investors and that non-professional investors recognize the value of strong audit committees.     

资产负债表价值相关性的检验

当资产存量(或流量)信息更具有价值相关性时,表明投资者相对地重视资产负债表信息(或损益表信息)。结合中国资本市场的实际情况,从理论分析中得出:中国资本市场的亏损企业面临比较明显的流动资产效应,这种效应在企业盈利质量较差的情况下尤其突出。运用2005～2006年中国资本市场的数据进行实证检验,实证检验结果与理论分析相一致。     

Does Limited Attention Constrain Investors’ Acquisition of Firm‐specific Information?

According to the framework outlined in Peng and Xiong ( 2006 ), attention‐constrained investors tend to process more market‐ and sector‐level information. We empirically test this theory. We find that firms with higher media coverage have lower contemporaneous stock return synchronicity. Such an effect is robust to analyses within size deciles, inclusion of firm fixed effects, estimation using a matched sample, and a two‐stage least squares approach. The effect becomes less pronounced during the financial crisis period when both the quantity and quality of firm‐specific information decrease. Further, the attention from media coverage has a spillover effect on the firm's industry peers without media coverage. Finally, investors of firms with higher media coverage are more efficient in incorporating future firm performance into current stock prices. Collectively, our findings support the theory in Peng and Xiong ( 2006 ) that investors increase their acquisition of firm‐specific information when a firm captures their attention.     

The price impact of foreign institutional herding on large-size stocks in the Taiwan stock market

This study constructs a panel threshold regression model to explore the price impact of foreign institutional herding of firms listed in the Taiwan Stock Exchange during January 2000 to June 2008. Our panel threshold model is constructed to explore the price impact of foreign institutional investors?? herding in the Taiwan stock market after controlling the firm size. By examining the presence of threshold effect, this study analyzes whether firm size would obviously and asymmetrically affect the explanation for the effect of changes in foreign investors?? share ownership on abnormal returns. The empirical results of this study find the significant evidence of threshold effect which divides the stocks into large-size and small-size firms. It is found that foreign institutional investors in the Taiwan stock market tend to hold large-size stocks listed in the Taiwan Stock Exchange. There is an apparent increase in the subsequent abnormal returns on large-size stocks bought in bulk by foreign investors. The signals of changes in share ownership initiated by foreign institutional investors would reveal further information for improving the performance of asset reallocation decisions in Taiwan. The panel threshold model constructed in this paper well describes the price impact of institutional herding yet eschews the possibly subjective data snooping issue resulting from the two-pass sorting method as proposed by previous related researches.     

从基金暂停申购看投资者权益保护

开放式基金制度设计的初衷是赋予投资者自由申购赎回的权利,只有在特定情况下才能暂停申购以维护持有人权益。本文深入研究了我国开放式基金暂停申购的各种情况、背后的原因以及对投资者权益的影响,认为基金管理人在暂停申购决策过程中具有较大的自主空间,可能利用暂停申购,实现自身利益最大化而损害持有人利益。为规范基金暂停申购,维护投资者权益,本文建议应加强对基金管理人的监管和约束,细化基金暂停申购的具体规则,完善暂停申购信息披露制度,改进对长期暂停申购基金的评价方法等。     

Follow the Crowd: How Social Information and Social Identity Influence Investing Decisions

Increasingly, jurisdictions around the world have been enacting standards that formally allow organizations to offer equity using the crowdfunding model. Using the Internet, the crowdfunding model raises capital by soliciting from a large number of people (i.e., the crowd). A key feature of crowdfunding that has been embraced by regulators is the use of social information to inform investors as a safeguard for this type of investing. However, research has not yet explored how investors utilize this information. In this study, I investigate whether social information can shift investors away from financial maximization goals. Social identity theory predicts that people can be provoked to act as representatives of their group, setting aside individual interests. I predict, and find, that positive social information focused on an equity crowdfunding organization can activate the social identity of investors who share an identity with that organization, causing them to invest more in a relatively weak organization. In a moderated mediation analysis, I find that positive social information provokes investors who share an identity with an organization to feel a stronger connection to that organization, leading them to increase investment. In addition, I explore whether investors’ perceptions of negative social information are moderated by their social identity. I find that investors who are deeply committed to an identity shared with an organization experiencing negative social information will defensively invest in that organization. The findings of this study will be of interest to investors, regulators, and crowdfunding organizations.     

Sustainability priorities,corporate strategy,and investor behavior

Using a sequential experiment, this study examines whether integration of material environmental, social, and governance (ESG) priorities into corporate strategy impacts investors’ short‐ and long‐term stock price assessments and investment allocation. In our examination, we consider the potential moderating effect of financial performance. We find that integration of ESG priorities into strategy does not have a significant effect on investors’ price assessments or investment allocation. This is true regardless of the trend in the company's financial performance. Our results hold across various demographics and the levels of investment knowledge and investment experience. Investors’ perception of relevance and reliability of material ESG information, however, has a mediating effect on their long‐term price assessment and investment allocation. Overall, our findings suggest that any future requirements on disclosure of ESG information by regulators and standard setters should aim to improve investors’ perception of the relevance and reliability of that information.     

上市公司的地理特征影响机构投资者的持股决策吗?——来自中国证券市场的经验证据

随着技术科技的高速发展,企业与其利益相关者的距离被无限拉近,彼此之间的沟通也日趋频繁。但是投资者与被投资对象的地理特征影响信息的获取数量和质量,因此他们之间的互动成本和强度很大程度上仍然取决于上市公司的地理特征。本文在分析我国上市公司地理分布特征的基础上,考察了地理特征变量在机构投资者持股决策中的作用。研究发现,位于东部地区的上市公司更受机构投资者的亲睐,即使在控制上市公司财务信息和市场表现信息的情况下,区域地理特征变量仍然显著影响机构投资者的持股决策;上市公司办公地与机构投资者之间的距离远近负向影响机构投资者的持股比例,但是在控制上市公司基本面信息的情况下,距离特征变量的影响力下降。     

An examination of market efficiency: Information order effects in a laboratory market

A series of laboratory double auction experiments is conducted to examine whether the order of information releases affects market prices. Behavioral research on belief revision has shown that individuals are influenced by the order in which a series of information items is presented. The experiments are designed to provide a controlled investigation of whether order effects as displayed by individuals also can influence prices in a market setting where outcomes are not a simple aggregation of individual behavior. Significant evidence is found of a recency effect in the experimental asset markets.