Are Investors Influenced by Accounting Presentation Format and Announcement Prominence of Special Items?

Purpose
Management has considerable discretion over how to present and announce earnings components that are either unusual or infrequent, but not both (hereafter referred to as special items). In this study, we study the independent and joint effects of the accounting presentation format of, and the level of announcement prominence given to income-decreasing special items on investors’ judgments about the persistence of declining earnings.

Methodology/approach
Our study uses a 3 (format) × 2 (prominence) between-subjects design. In the experiment, participants act as proxies for nonprofessional investors to assess the persistence of a hypothetical firm’s declining earnings and make investment decisions.

Findings
Our results suggest that investors’ judgments are influenced by accounting presentation format and the level of announcement prominence. With respect to format, both classification and disaggregation affect investors’ assessment of earnings persistence. In addition, the degree of prominence given to an income-decreasing special item, albeit self-serving and not audited, introduces additional influence beyond that of accounting presentation format. In particular, we find that announcement prominence has a greater effect when the special item is aggregated with other operating expenses than when the special item is presented under the two other alternatives.

Research implications
Our study contributes to the literature by demonstrating that presentation format and announcement prominence both have significant impact on investors’ judgments and decisions, and that their effects are interactive. Our results also indicate that future research can possibly gain better insight if it considers the accounting attributes of the special items in addition to their economic attributes.