Communicating measurement uncertainty : an experimental study of financial reporting implications for managers and investors

Range disclosures of estimates, whether in an expanded auditor’s report or by managers, would be intended to communicate measurement uncertainty to investors. Knowing this information should enhance investors’ ability to identify aggressive reporting, thereby possibly increasing investor actions taken against managers. In a laboratory experiment, I find that students in a managerial reporting role (hereafter, managers) report less aggressive estimates of an asset’s value when ranges of possible estimates accompany their point estimates reported to students in an investor role (hereafter, investors), such that investor actions against managers do not increase when ranges are disclosed. However, this decline in aggressiveness is concentrated in managers with a greater degree of association with one or more of the following personalities: psychopathy, narcissism, and Machiavellianism (collectively deemed the “Dark Triad” in psychology). Notably, this result occurs because, in a regime of no range disclosure, these managers report relatively aggressive estimates to investors, irrespective of their private information about the asset’s true value, while managers exhibiting low association with any of these personalities report estimates that more accurately reflect their private information. Range disclosure disciplines the former group of managers, which suggests that requiring range disclosure would discipline the reporting of the managers who are the most prone to take advantage of investors absent the communication of this information.