Effects on investor judgments from expanded disclosures of non-financial intangibles information

In response to evidence of an increasing disconnect between financial reporting and firm value, a number of commentators have called upon firms to expand their disclosures of intangibles information, particularly disclosures of non-financial measures. In this study, I use an experiment to examine whether and when expanded disclosures of non-financial intangibles information affect investor judgments of financial performance. I propose that, given the complexity of the relationships between today’s intangibles activities and future financial results, investors may fail to retain and/or use the information contained in nonfinancial intangibles disclosures, and performance on non-financial measures may not be reflected in their judgments of future financial performance. Certain investors, those who have high familiarity with the industry setting, should have well-developed causal models that allow them to use the non-financial measures and relate them to judgments of future financial performance. On the other hand, investors who have low familiarity with the industry setting may not have welldeveloped causal models, so that expanded disclosure of non-financial information may not be sufficient to influence these investors’ judgments. Instead, these investors may need to receive supplemental discussion of how a firm’s non-financial measures are causally linked to future financial performance in order to use the non-financial information. Experimental results for the full sample, combining high familiarity and low familiarity investors, are mixed, and are related to which performance measure is used as the dependent variable. I also examine the results for the subset of investors with relatively low familiarity with the industry setting used in the study. For these investors, disclosure of non-financial measures alone is not sufficient to influence their performance judgments, and non-financial measures are incorporated into performance judgments only when the supplemental causal links discussion is provided. Additional analysis suggests that these results for the low familiarity investors are due to supplemental causal links discussion affecting the use of non-financial information in investors’ performance judgments, and are not due to causal links discussion affecting retention of nonfinancial information. This study provides evidence on the effects on investor judgments from expanded intangibles disclosures and the necessary conditions for achieving such effects.