The effect of investor sophistication on the influence of nonfinancial performance indicators on investors' judgments

This paper presents an experiment that examines how enhanced disclosure of nonfinancial performance indicators affects the stock-price estimates of nonprofessional and professional investors. Participants were provided with a case study containing excerpts from a hypothetical company’s annual report. The experiment was a 2 (nonprofessional and professional) × 3 (positive nonfinancial performance indicators, negative nonfinancial performance indicators, and financial information only) between-subjects design. Consistent with conservatism, the nonprofessional investors underreacted in their stock-price estimates to the positive nonfinancial disclosures, compared with professional investors with task-specific knowledge. The results from this study suggest that the value of enhanced disclosure of this type may not flow equally to all users of financial reports, if conservatism, and lack of task-specific knowledge, adversely affect their decision-making.Paul J. Cora