The effect of investor sophistication on the influence of nonfinancial performance indicators on investors’ judgments
Particular thanks to Gary Monroe, Ted Mock and David Woodliff for helpful comments on this paper; also thanks to Jeff Cohen, Michael Davern, Colin Ferguson, Jim Frederickson, Frank Hodge, Bryan Howieson, Jane Hronsky, Greg Jonas, Nathan Stuart, Stephen Taylor and Ken Trotman. I also acknowledge the input of participants at the 2008 American Accounting Association Annual Meeting, and workshop participants at Deakin University, the University of Adelaide, the University of Melbourne and the University of Technology, Sydney.
Abstract
This paper presents an experiment that examines how enhanced disclosure of nonfinancial performance indicators affects the stock-price estimates of nonprofessional and professional investors. Participants were provided with a case study containing excerpts from a hypothetical company’s annual report. The experiment was a 2 (nonprofessional and professional) × 3 (positive nonfinancial performance indicators, negative nonfinancial performance indicators, and financial information only) between-subjects design. Consistent with conservatism, the nonprofessional investors underreacted in their stock-price estimates to the positive nonfinancial disclosures, compared with professional investors with task-specific knowledge. The results from this study suggest that the value of enhanced disclosure of this type may not flow equally to all users of financial reports, if conservatism, and lack of task-specific knowledge, adversely affect their decision-making.
1. Introduction
The number of nonprofessional investors in financial markets continues to increase across many western industrialised countries. Protection of these investors has motivated a number of jurisdictions to introduce regulation to enhance the amount and type of disclosure by companies. There have also been a few important reports suggesting the benefits of enhanced disclosure of nonfinancial performance indicators (American Institute of Certified Public Accountants (1994); Financial Accounting Standards Board (2001); Enhanced Business Reporting Consortium (2005)). A review by the American Accounting Association Financial Accounting Standards Committee (2002) summarised that nonfinancial performance measures are relevant for valuing corporate equity, but that the ability of investors to use this type of information was limited. This study investigates whether nonprofessional investors evaluate this type of enhanced information in a manner that is consistent with professional investors.
Nonprofessional investors are an important and growing group of financial statement users. In the United States about 41 million nonprofessional investors invest directly in the stock market (Securities Industry Association, 2002). In Australia, where this study was performed, the importance of nonprofessional investors is emphasised by the fact that at the beginning of 2004, 51 per cent of the adult population owned stocks and 39 per cent owned stocks directly (Carson, 2004). The problem of sub-optimal decision-making by nonprofessional investors is of concern because of the evidence suggesting that market prices may not always be informationally efficient, from both archival (e.g. Sloan, 1996; Frankel and Lee, 1998) and experimental research (e.g. Bloomfield and Libby, 1996; Calegari and Fargher, 1997). Exacerbating this problem is research that also suggests less-informed individuals are over-confident in their knowledge and information, relative to more-informed individuals (Bloomfield et al., 1999). Research has examined the performance of nonprofessional investors because of differing financial statement formats (e.g. Maines and McDaniel, 2000; Frederickson and Miller, 2004; Hodge et al., 2004) and due to types of financial statement disclosures (e.g. Kennedy et al., 1998). This research has found that nonprofessional investors use different valuation models and process information differently from professional investors. However, except for Jackson (2008), there is limited research on how nonprofessional investors respond to enhanced disclosures of value-relevant nonfinancial information.
It has been documented that the market exhibits an underreaction to new financial disclosures in the short term (Barberis et al., 1998; Chan et al., 2004), which has been suggested is consistent with the phenomenon of conservatism from the psychology literature (Edwards, 1968). However, Smith and Kida (1991) note that unintentional cognitive effects (e.g. conservatism), are more likely when individuals lack task-specific knowledge, such as nonprofessional investors. This is why this effect is expected to be most pronounced when there is a ‘new’ disclosure, such as nonfinancial performance indicators, compared with financial disclosures which are more familiar to all users. This study examines whether conservatism affects nonprofessional investors in their evaluation of enhanced disclosure of nonfinancial information, and whether task-specific knowledge mitigates this effect by comparing them with professional investors with task-specific knowledge.
Coram et al. (2009) found that sophisticated financial statement users did react appropriately to both positive and negative nonfinancial disclosures. However, consistent with attribution theory, it was also found that assurance added value only in the positive nonfinancial disclosure condition and not when the disclosure was negative.
This study uses the same experimental materials as Coram et al. (2009), but utilises nonprofessional investors and examines how they react to value relevant nonfinancial information disclosed by a company. These nonprofessional investors were 111 members of the Australian Shareholders Association (ASA) who were active investors in the marketplace. This group was compared with a group of professional investors, who were 68 Chartered Accountants trained in valuation concepts, the importance of firm strategy, as well as the importance of qualitative and nonfinancial information in company evaluations. The experiment was a 2 (nonprofessional and professional investors) × 3 (positive nonfinancial performance indicators, negative nonfinancial performance indicators, and financial information only) between-subjects design. Participants were provided with a hypothetical firm’s annual report including: company information, financial reports and an audit report. The two groups who received nonfinancial information as an additional disclosure in the annual report were provided with either positive or negative disclosures of nonfinancial performance indicators. Participants were asked their perceptions on whether the stock-price of the company would increase, decrease (and by what percentage) or stay the same based on the information provided.
The results show that there is conservatism in how nonprofessional investors reacted to nonfinancial disclosures compared with professional investors, although a significant difference between the two groups was only observed in the positive condition. This provides some evidence to support Smith and Kida’s (1991) assertion that task-specific knowledge can mitigate unintentional cognitive effects.
This study provides evidence of a lack of effect on nonprofessional investors’ evaluations in response to positive value-relevant nonfinancial information, consistent with conservatism. This finding has implications for regulators in their attempts to protect nonprofessional investors in the marketplace. Rather than simply mandating more disclosure, perhaps it would also be beneficial to encourage nonprofessional investors to learn more about financial statement analysis and valuation concepts (i.e. obtain task-specific knowledge) or seek professional advice.
2. Theory and hypotheses
2.1. Disclosure of nonfinancial information
An important type of additional disclosure recommended by the AICPA (1994), FASB (2001) and EBRC (2005) are disclosures relating to nonfinancial performance indicators. Research has examined whether this type of disclosure has value relevance (Amir and Lev, 1996; Ittner and Larcker, 1998; Hirschey et al., 2001), and also whether it has predictive ability in relation to future financial measures (Ittner and Larcker, 1998; Banker et al., 2000, 2004). However, a recent study found that more voluntary disclosure (which included significant levels of nonfinancial information) did not improve the association between current returns and future earnings (Banghøj and Plenborg, 2008).1 Examination of analysts’ reports also suggest that analysts use a significant amount of nonfinancial information in making their assessments about a company’s future performance (Previts et al., 1994; Rogers and Grant, 1997; Breton and Taffler, 2001). Overall, these studies support the proposition that enhanced disclosure of nonfinancial information is value relevant and will improve financial statement users’ judgments and decision-making. There has been limited behavioural research into the use of nonfinancial information. Jackson (2008) found investors were more likely to rely on nonfinancial measures when they were scale compatible to financial investment screens. Coram et al. (2009) examined the use of nonfinancial information by sophisticated users of financial statements and found that nonfinancial information affected stock-price estimates.
In summary, there have been many calls for enhanced disclosure of nonfinancial information, and there is archival evidence to suggest that there are benefits from this type of disclosure. This study will examine in an experimental setting whether different investor groups properly evaluate this type of information. It is expected that professional investors will respond in a manner consistent with the findings of market-based studies. This is less clear for the nonprofessional investors and it is very difficult to examine the decisions of this group through market-based studies. However, it is important to examine judgments and decisions of nonprofessional investors because the regulatory changes and calls for enhanced disclosure have, in part, been made to protect this particular group of financial statement users. The expectation based on the prior literature on nonfinancial information disclosure is that nonprofessional and professional investors will find the disclosure of nonfinancial information to be value relevant in their perceived assessment of stock-prices.
H 1 : Disclosure of positive (negative) nonfinancial performance indicators will increase (decrease) nonprofessional investors’ stock-price estimates.
The next hypothesis proposes that professional investors will find the disclosure of this information to be value relevant, consistent with the archival research, research on analysts’ reports and Coram et al. (2009).
H 2 : Disclosure of positive (negative) nonfinancial performance indicators will increase (decrease) professional investors’ stock-price estimates.
However, there is evidence that individuals do not always react to information disclosures in a rational manner and this effect may be exacerbated for nonprofessional investors.
2.2. Conservatism and investor sophistication
Barberis et al. (1998) note that there is significant empirical finance evidence of underreaction to news announcements in the short term. They suggest that this is consistent with conservatism, a phenomenon documented in the psychology literature (Edwards, 1968). Conservatism states that individuals are slow to change their belief in the face of new evidence. In experiments conducted by Edwards (1968), it was found that individuals adjusted their benchmarks appropriately but it was by too little compared with a rational Bayesian. Chan et al. (2004) evaluated two of the psychological biases of representativeness and conservatism, by examining trends and consistency of accounting performance and pricing consequences. They found some evidence consistent with underreaction and consistent with conservatism.2
Studies have shown that nonprofessional investors behave quite differently from professional investors. For example, verbal protocol research has shown that nonprofessional investors have ill-defined valuation models that cause them to use sequential search strategies compared with experts who use directed search strategies (Bouwman, 1985; Anderson, 1988).
Less sophisticated investors’ judgments have also been found to be influenced by pro forma earnings disclosures, whereas analysts were not (Frederickson and Miller, 2004). This observed effect appeared to be caused by unintentional cognitive effects, such as the dilution effect (e.g. Nisbett et al., 1981) and anchoring (e.g. Tversky and Kahneman, 1974). This finding was consistent with evidence from Smith and Kida (1991) that unintentional cognitive effects are more likely when individuals lack task-specific knowledge.
In auditing, task-specific knowledge has been shown to be associated with better assessments by auditors (Bonner, 1990). Bonner and Lewis (1990) stated that in explaining performance there were different types of knowledge: general domain knowledge, subspecialty knowledge and world knowledge. Further, they also noted that general problem-solving ability affected performance. It was found that very specific measures of knowledge, task-specific experience or training often provided the best explanations for expertise (Bonner and Lewis, 1990). Studies have found that use of worked examples is a way to obtain this task-specific knowledge in auditing (Bonner and Walker, 1994) and management accounting (Wynder and Luckett, 1999).
This study examines whether the task-specific knowledge obtained by professional investors will mitigate the conservatism as expected from nonprofessional investors in reacting to enhanced disclosure of value-relevant nonfinancial information. In this experiment, the valuation of a company with nonfinancial performance indicators is a subspecialty within the domain of company valuation expertise. It is not a disclosure that nonprofessionals would normally be familiar with so the effect of cognitive biases is expected to be more pronounced than if the positive and negative disclosures were financial ones. It is expected that formal instruction through the training received by the professional investors will improve their ability to make assessments of the valuation of companies with this information disclosure. It is therefore expected that conservatism would be observed for nonprofessional investors in underreactions to both positive and negative nonfinancial information disclosures. These expectations are stated in the following hypotheses:
H3 a : Disclosure of positive nonfinancial performance indicators will affect nonprofessional investors’ stock-price estimates less than those of professional investors.
H3 b : Disclosure of negative nonfinancial performance indicators will affect nonprofessional investors’ stock-price estimates less than those of professional investors.
3. Experimental method
This study used a 2 (nonprofessional and professional) × 3 (positive, negative, and financial only) between-subjects design. The first between-subjects factor represented two types of investors, nonprofessional and professional. A significant amount of research has evaluated the behaviour of nonprofessional investors and much of it has used MBA students as surrogates for these users (Hirst et al., 1995; Kennedy et al., 1998; Maines and McDaniel, 2000; Frederickson and Miller, 2004; Chang et al., 2008). This study uses actual nonprofessional investors who were members of the ASA. The experimental materials were distributed to members who were attending monthly meetings of the ASA across Australia, indicating that they were active and engaged members of the ASA. Although it is acknowledged that nonprofessional investors are a heterogeneous group, these individuals were a very good representation of active and engaged nonprofessional investors. From distribution of materials, 115 usable responses were received. In examining the data, there were four outliers from their stock-price estimates. These were removed and further analysis was performed on the remaining 111. These participants were experienced investors in the market. The mean number of different stocks owned was 24.5 and the mean number of stock trades each year was 21.4.3 They rated themselves with a moderate knowledge of the meaning and interpretation of financial statements, with a mean response of 5.6 (to a Likert scale question anchored by 0 ‘naïve’ and 10 ‘sophisticated’).4 Forty per cent of these participants were between 55 and 64 years of age and 63 per cent had an undergraduate or higher degree.
The ‘professional investors’ were stockholders with task-specific knowledge. These participants were Chartered Accountants who had received extensive training that had developed the task-specific knowledge. Two modules of their training, namely ‘CA Foundations’ and ‘Strategic Business Management’ specifically included material on financial valuation concepts, the importance of strategy, the Balanced Scorecard (BSC), as well as the importance of qualitative and nonfinancial information in company evaluations. These materials also used worked examples, which have also been shown to assist in obtaining task-specific knowledge (Bonner and Walker, 1994; Wynder and Luckett, 1999). This task-specific knowledge is why it was expected that this group would be able to appropriately incorporate the additional disclosures in their decision-making process. The majority of these participants had work experience of between 2 and 4 years. This group was a subset of 71 of the sophisticated users from the Coram et al. (2009) study. The selection of the subset was based on only those who had received the ‘no assurance’ condition in the experiment and only those who owned stock. These participants performed this experiment under controlled conditions, however, three were outliers in terms of their stock-price estimates and the analysis was therefore performed on the remaining 68. The mean number of different stocks owned was 4.6 and the mean number of trades was 56 (median 2). They rated themselves with a good knowledge of the meaning and interpretation of financial statements, with a mean response of 6.5. A t-test was performed comparing this mean response with the nonprofessional investors’ mean response of 5.6 and the difference was significant (t = −3.13, p = 0.002).
The participants were provided with a case study containing excerpts from the fictitious company’s annual report, which included the stock-price before disclosure of the annual report. The case study was the same as that used in Coram et al. (2009). The case study held constant the background information and the financial statements across the treatment groups. The background information provided general information about the company and the industry in which it operated, as well as the average and range of price-earnings ratios for the industry. All of this information was designed to be ‘average’ and not to raise any concerns for participants in evaluating the annual report. The three basic financial statements comprising the income statement, balance sheet and statement of cash flows were provided with 2 years of comparative information. These statements were originally based on a real company, however, they were substantially amended for the purposes of this experiment.5 The financial information was accompanied by an unqualified audit report.
The independent variable related to the nature of the disclosures provided by the company. The three manipulations were: first, provision of financial statements with the positive nonfinancial performance indicators; second, provision of the financial statements with the negative nonfinancial performance indicators; and finally, provision of financial statements only. As a consequence, there were three discrete versions of the experiment. This enhanced information disclosure was in the form of a BSC outlining nonfinancial performance indicators related to the strategy employed by the company. The BSC is a performance measurement approach that is based on integrating leading indicator nonfinancial measures with financial ones (Kaplan and Norton, 1992) and it also emphasises the importance of linking nonfinancial performance to strategy (Kaplan and Norton, 1993). The BSC was developed from the common BSC measures used by Lipe and Salterio (2000) and no assurance was provided on the information. These materials were developed into ‘positive’ and ‘negative’ versions based on a pilot test.6 See the Appendix for the positive and negative versions of the nonfinancial performance indicators used in this study. The order of the financial and nonfinancial information was varied for half of the cases provided with the enhanced disclosure, and this did not affect the stock-price estimates for either group.
They were then asked their perceptions on whether the company’s stock-price would increase or decrease (and by what percentage), or stay the same based on the information provided.7 The dependent variable was calculated by multiplying participants’ expected change in stock-price by the stock-price before disclosure of the annual report (which was $5.70) to get an ‘expected stock-price’.
4. Results
4.1. Manipulation checks
The variable manipulated in this experiment was whether the nonfinancial disclosure was positive or negative. In the debriefing question, participants were asked their perception of the level of the nonfinancial performance indicators. Their response was measured on a 11-point Likert scale anchored by 0 ‘very poor’ and 10 ‘very good’. For the nonprofessional investors, the group provided with positive nonfinancial information rated the nonfinancial information significantly higher than the group provided with negative nonfinancial information, with a mean of 6.34 compared with 4.90 (t = 2.85, p = 0.006). Similarly for the professional investors, the group provided with positive nonfinancial information rated the nonfinancial information significantly higher than the group provided with negative nonfinancial information, with a mean of 5.96 compared with 4.53 (t = 2.42, p = 0.020). These results suggest that the manipulation for both groups of investors was seen as intended. The fact that the perceived level of the negative nonfinancial disclosure was just below the midpoint and the positive nonfinancial disclosure was just above the midpoint provides evidence that the manipulation was not too obvious to participants.
4.2. Tests of hypotheses
The first two hypotheses relate to whether the positive and negative nonfinancial performance indicators affect the nonprofessional and professional investors’ stock-price estimates. Hypotheses 1 and 2 were tested by examining stock-price estimates of participants who were provided with nonfinancial information, compared with the estimates of participants who were provided with financial information only. Descriptive statistics are shown in Table 1, Panel A.
The analysis of variance test presented in Table 1, Panel B shows that there is a significant difference in the stock-price estimate for all investors because of the provision of nonfinancial information (F = 14.21, p < 0.001). To test Hypothesis 1, relating to the effect of this information on nonprofessional investors, simple-effects tests were performed. As can be seen in Table 1, Panel C, there is no difference between the mean stock-price estimate for the positive nonfinancial information condition compared with the financial information only condition. There is a difference in the mean stock-price estimate for the negative nonfinancial condition and the financial information only condition of $0.10 and that difference is significant (t = −1.97, p = 0.027). The lack of a reaction by the nonprofessional investors to the positive disclosure means that Hypothesis 1 is not supported. Hypothesis 2 relates to the professional investors. As can be seen in Table 1, Panel C, the difference between the positive nonfinancial condition and the financial information only condition is $0.09 and is significant (t = 1.66, p = 0.052). The difference between the negative nonfinancial condition and the financial information only condition is $0.20 and is also significant (t = −3.22, p = 0.001). These results support Hypothesis 2. Overall, these results are generally consistent with archival research that suggests nonfinancial information is value relevant, except for the fact that the nonprofessional investors did not adjust their stock-price estimates because of the provision of the positive nonfinancial information.
Hypotheses 3a and 3b provide a comparison between the two groups to evaluate whether the task-specific knowledge acquired by the professional investors ameliorates the conservatism to new information disclosure as might be expected from the psychology literature (i.e. underreaction of nonprofessionals to positive and negative nonfinancial information). Table 1, Panel D first shows that the difference in mean stock-price estimates for the positive disclosures compared with the financial information only condition for the nonprofessional investors compared with the professional investors. The mean stock-price difference for the nonprofessionals is $0.00 compared with $0.09 for the professionals and this was significantly different (t = 1.77, p = 0.041), supporting Hypothesis 3a. Table 1, Panel D next shows the difference in mean stock-price estimates for the negative disclosures compared with the financial information only condition, the mean stock-price difference for the nonprofessionals is 0.10 compared with 0.20 for the professionals, which was not significant (t = −1.42, p = 0.081), therefore, not supporting Hypothesis 3b. These findings suggest that nonprofessional investors are more conservative, but it is only in relation to positive nonfinancial disclosures. The findings are consistent with the marginally significant interaction that can be seen between ‘type of investor’ and ‘disclosure’ in Table 1, Panel B. These differences are illustrated in Figure 1 that shows the stock-price estimates across the three disclosure conditions for the nonprofessional and professional investors. As can be seen in Figure 1, the interaction between the variables is driven by the lack of reaction by nonprofessional investors to the positive nonfinancial performance indicators.
Differences in stock-price estimates for nonprofessional and professional investors.
In summary, both groups of investors react in a negative way in their stock-price estimates to negative nonfinancial disclosures. This reaction to the negative information suggests that irrespective of the task-specific knowledge, negative information per se, provokes an investor response. In relation to the positive disclosures, the professional investors with task-specific knowledge did react as expected to the provision of positive nonfinancial information in their stock-price estimates, however, on average, the nonprofessional investors did not react to this information, which is consistent with conservatism.
4.3. Sensitivity analyses
Tests were conducted to assess whether there were differences because of investors having more experience as measured by the extent of their stock trading and the size of their stock portfolio. Analysis of covariance tests were performed for the nonprofessionals and professionals that included the number of stocks owned and the number of stocks traded for the year as covariates. These variables were not found to have a significant effect on the stock-price estimate for the nonprofessionals (number of stocks traded, F = 0.801, p = 0.373; number of stocks owned, F = 0.002, p = 0.961) or professionals (number of stocks traded, F = 1.767, p = 0.189; number of stocks owned, F = 0.171, p = 0.680), providing evidence that these factors did not make a difference to the results within the two different participant groups.
Another factor examined that may have affected the validity of the results was whether the investors had differing perceptions on the reliability of the nonfinancial information dependent on whether it was positive or negative trending. A simple-effects test was performed that compared the differing perceptions of reliability of the nonfinancial information between the positive and negative nonfinancial performance information conditions. Participants were asked to assess the reliability of the nonfinancial performance indicators and respond on a 11-point Likert scale anchored with 0 ‘not reliable’ and 10 ‘very reliable’. The assessed reliability for nonprofessional investors provided with positive nonfinancial performance indicators was 5.9 compared with 6.1 for the group provided with negative nonfinancial performance indicators and this difference was not significant (t = 0.485, p = 0.629). This provides some assurance that differing perceptions on the value of the disclosures for nonprofessional investors were not because of participants perceiving the positive disclosure as being less reliable. This also provides some evidence that the lack of reaction to the positive disclosure was not because of concerns about the motivations of management, as might be expected from attribution theory (Koonce and Mercer, 2005).
5. Conclusions and implications
There have been many calls for enhanced corporate disclosure and also regulation to increase corporate transparency in recent years. A significant amount of this extra corporate disclosure is nonfinancial in nature. Archival research has consistently shown that this type of information is value relevant. However, the fact that the market based research shows this information to be value relevant does not necessarily mean that it is viewed in that way by nonprofessional investors, particularly if there are biases in their decision-making that are exacerbated by their lack of task-specific knowledge. Given that one user group of interest in the calls for enhanced transparency and corporate disclosure are nonprofessional investors (Levitt, 1997), and that they comprise a growing segment of financial information users, how they evaluate and make decisions on this type of enhanced disclosure is an important issue to examine.
An underreaction to disclosure has been observed in the empirical finance literature (Barberis et al., 1998; Chan et al., 2004), which these studies note is consistent with conservatism in the face of new evidence from the psychology literature (Edwards, 1968). The finance literature has generally focused on the reaction to earnings news, however, the theory would suggest that the effect be observed for any type of new information that is value relevant. This study provides experimental evidence that task-specific knowledge assists professional investors to mitigate this bias when evaluating nonfinancial information, however, a significant difference between the groups was only found when the disclosure was positive. This provides evidence that the bias was mitigated for the professionals in the positive disclosure condition.
Both groups of investors had significantly lower stock-price estimates in response to the negative nonfinancial disclosures compared with the financial information only conditions, as would be expected. The nonprofessionals did have an underreaction compared with the professionals but the difference was not significant. This suggests that irrespective of the level of task-specific knowledge, negative information per se will cause an investor reaction. It is possible that this could be because of a ‘negativity bias’, as studies have shown that negative aspects of an object, event or choice are weighted more heavily than positive aspects in judgments (Kahneman and Tversky, 1984; Peeters and Czapinski, 1990). This ‘negativity bias’ was observed in a recent study examining investors’ decision-making (Cianci and Falsetta, 2008). In relation to this present study, this would explain why the nonprofessional investors had some reaction to the negative information but no reaction to the positive information and why the professional investors had a greater reaction to the negative information than the positive information.
A couple of limitations to the study beyond those inherent with experimental studies were present. Nonprofessionals did not conduct the experiment under controlled conditions, whereas the professional investors did. However, there is no evidence to suggest that this affected the results in any way. The study also discusses how ‘task-specific knowledge’ will mitigate the conservatism expected in response to new information. This knowledge is inferred from the fact that the professionals had been trained on financial valuation concepts, the importance of strategy, and the BSC. However, there was no specific test at the end of the experiment on these concepts.
In summary, this research provides evidence that task-specific knowledge on nonfinancial disclosures assists investors to better understand and combine this information in a company valuation assessment and also assists in overcoming potential cognitive biases. Further, these findings provide some evidence that there may be consequences to enhanced disclosures by firms that may not have been anticipated by regulators. While there are certainly knowledgeable and sophisticated market participants who will react appropriately to enhanced disclosure in the marketplace, there are other less sophisticated users who will react to the information in an inappropriate manner. The conservative reaction of nonprofessional investors to positive nonfinancial disclosures by companies may be detrimental to their welfare if they then make decisions consistent with this reaction. This is a curious outcome given these users are an important group that the enhanced disclosure requirements are designed to protect. Future research should examine how biases and lack of task-specific knowledge of nonprofessional investors can be mitigated so that enhanced disclosures in the marketplace can be of benefit to all users of financial statements.
Footnotes
Appendix
Nonfinancial performance indicators
The Company uses the Balanced Scorecard approach as a tool within the firm to link the development of strategy to performance. Strategic objectives are organised in a framework of customer, internal business processes, learning and growth.
Strategy
The Company’s strategy is to produce high-quality products and always put its customers first. Putting customers first means enhancing its relationship with them and responding to their needs. The Company will always try to ensure that its suppliers provide goods of the highest quality. The Company also has a commitment to continue the development of its own brand and ensuring its recognition in the market. Crucial to this success of this strategy is the importance and value the Company has and will continue to place on its sales staff.
The Balanced Scorecard
The Company uses the Balanced Scorecard approach to measure performance, which encompasses financial and nonfinancial measures. As part of this approach there are a number of measures that are reviewed and monitored to targets by management. The Company has a Market Research Department that undertakes research to measure some of the key nonfinancial performance indicators for the Company as reported below.
This is the first time that the Company has publicly disclosed this information.
(Panel A shows the positive nonfinancial indicators and Panel B should the negative nonfinancial indicators).
Panel A: Positive nonfinancial performance indicators
| Nonfinancial performance indicator | Current year | Prior year |
|---|---|---|
| Customer-related | ||
| Repeat sales (%) | 50 | 45 |
| Returns by customers (% of sales) | 2.5 | 3 |
| Customer satisfaction rating (%) | 80 | 75 |
| Internal business processes | ||
| Returns to suppliers (%) | 2 | 2.5 |
| Average markdowns (%) | 5 | 6 |
| Sales from Trailblazers’ brand (%) | 70 | 65 |
| Learning and growth | ||
| Average tenure of sales personnel (years) | 4 | 3.5 |
| Hours of employee training per employee (per year) | 60 | 55 |
| Employee suggestions per employee | 7 | 6 |
Panel B: Negative nonfinancial performance indicators
| Nonfinancial performance indicators | Current year | Prior year |
|---|---|---|
| Customer-related | ||
| Repeat sales (%) | 15 | 17 |
| Returns by customers (% of sales) | 13 | 11 |
| Customer satisfaction rating (%) | 45 | 48 |
| Internal business processes | ||
| Returns to suppliers (%) | 12 | 10 |
| Average markdowns (%) | 38 | 33 |
| Sales from Trailblazers’ brand (%) | 20 | 22 |
| Learning and growth | ||
| Average tenure of sales personnel (years) | 1 | 1.2 |
| Hours of employee training per employee (per year) | 10 | 11 |
| Employee suggestions per employee | 1.2 | 1.4 |
