The effect of voluntary disclosure of non-financial performance: indicators on company valuation judgements: an experimental analysis
Creators: name: Coram, Paul
Publisher: name: The Australian National University
Year: 2005
Subjects: non-financial performance indicators; assurance; attribution theory

description: Transparency and disclosure are crucial to out corporate reporting system and in recent years there have been calls for more of both. This dissertation has two primary aims in addressing this issue. The first aim is to ascertain whether non-financial performance indicators impact users’ judgements and decision-making when assessing company performance. The second and associated aim is to assess the impact of assurance services in these non-financial performance indicators. This dissertation addresses these aims through the performance of two studies. Study One used the verbal protocol methodology to examine the information processing strategies and types of information utilised by financial analysts in valuing a company. Study Two drew on the results and case study materials from Study One and was a behavioural experiment performed on several participant groups, which examined the impact of the provision of non-financial performance indicator and assurance on users’ share price estimates and earnings forecasts. Study One found, as expected, that financial statements were the main source of information utilised in performing a company valuation. However, significant utilisation of non-financial performance indicators and assurance report was also observed from the verbal protocols. The experimental case material in Study One included a between-subjects manipulation relating to whether the financial information was positive or negative trending. It was found that participants in the negative trending group focussed significantly more on the financial statements, performed more algebraic calculations, and brought less information from memory to the task. This is consistent with the psychology literature that suggests negative information tends to be more diagnostic and elicits more cognitive analysis. Study Two was a behavioural experiment that used a 2 (positive and negative non-financial performance indicators) x 2 (assurance and no assurance) + 1 (base case) between-subjects design. Participants were asked to assess whether the company’s share price and earnings would increase, decrease or stay the same based on the information provided. The main participant group in the study was accountants, as they were expected to have expertise in financial statement and security valuation concepts. It was found that the non-financial performance indicators had a very significant effect in the expected directions on share price estimates and earnings forecasts. Assurance also had a significant effect on share rice estimates but only when the non-financial information was positive, consistent with attribution theory. The other two groups in Study Two were commerce students and Australian Shareholders’ Association members. The main significant finding fro these two groups was that negative non-financial performance indicators decreased their earnings forecasts. However, the order effects observed for these other two groups suggested that they may not have had the appropriate level of expertise as the main group to perform a task like this. In summary, for users with higher levels of expertise, non-financial performance indicators and assurance affect their judgments and decision-making. This should be of interest to managers in companies considering enhanced disclosure policies, regulators considering mandating disclosure of this type of information, and analysts and other financial statement users in deciding how to use this information.