Information Pursuit in Financial Statement Analysis: Effects of Choice, Effort, and Reconciliation

Abstract

Prior research provides evidence that information affects financial statement users' judgments less when that information is provided in a less accessible format (e.g., information disclosed in a footnote or less prominent financial statement rather than being recognized on the income statement [Maines and McDaniel 2000]). We provide evidence that, conditional on users performing the analysis necessary to transform the financial statements to appear as if disclosed information had been recognized, that information may affect users' judgments more than it would have if it had been recognized initially. Our experiments are set in the context of constructive capitalization of operating leases. The first experiment manipulates three variables that we hypothesize will contribute to this effect: choice to use transformed financial statements, effort spent on the transformation process, and reconciliation of pre- and post-transformation numbers. We provide evidence that, in the constructive-capitalization setting we operationalize, information has a greater effect on judgments when effort was expended to obtain the information and the information is displayed in a reconciled format. The second experiment focuses on the effort effect and replicates it with additional controls. These results have implications for standard-setters who consider the relative benefits of recognition and disclosure, and for financial statement users who transform financial statements as part of their analyses.

The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16

“…This is common in early papers related to the capitalisation of finance leases (e.g., Munter and Ratcliffe ; Wilkins and Zimmer ; Breton and Taffler ), and in more recent studies by Hales et al. () and Nelson and Taylor () referring to the capitalisation of operating leases. Nelson and Taylor () argue that when users constructively capitalise operating leases, their decisions are more affected by this information than if leases were recognised from the outset, partially due to the larger effort made when off‐balance information is under analysis.…”

Fifty-year overview of judgment and decision-making research in accounting

“…In their experiment, participants were required to capitalise the disclosed future payments of operating leases to evaluate their impact on the firm's solvency position. Drawing on psychological theories on the pursuit of information, Nelson and Tayler (2007) hypothesised that disclosed information would be useful to investors in their assessment of a firm's riskiness when they had to expend effort to convert the disclosed (disaggregated) information to an aggregated basis (i.e., similar to recognition format). They found that effort had a positive effect on the usefulness of disclosed information.…”

“…They found that when gains and losses were partly recognised in the Statement of Comprehensive Income, and partly disclosed in the notes, analysts were unable to distinguish between riskiness of exposed and hedged firms. Nelson and Tayler (2007) examined the impact of effort on the use of disclosed information. In their experiment, participants were required to capitalise the disclosed future payments of operating leases to evaluate their impact on the firm's solvency position.…”

Choice reversal in management decisions: the seductive force of new information

“…Although their findings are obviously relevant to managerial judgment and decision making, only a few scholars address this issue and report mixed findings. Nelson and Tayler (2007) demonstrated that participants who created information by themselves weighted it more heavily, however, they did not find a choice effect. Therefore, it is not clear if the information pursuit bias can be generalised to managerial decision making.…”