MD&A Risk Disclosures and Nonprofessional Investors' Perceptions and Investment Decisions

Abstract

This study uses an experimental approach to examine how the perceptions and decisions of prospective nonprofessional investors are influenced by risk disclosures in the Management Discussion and Analysis (MD&A). The between-subjects experiment used 157 MBA students as nonprofessional investors. The participants were given a firm's financial statements. In addition, the experimental group received the section on risk in the MD&A, whereas the control group did not receive any part of the MD&A. The participants were then asked to make several investment assessments and a final investment decision. The results show that the information included in the risk section of the MD&A has a significant negative effect on perceptions of the firm's future performance, a significant positive influence on perceptions of the stock's risk, and a marginally significant negative effect on the investment decision. The effect on the investment decision is mediated by respondents' perceptions of the firm's future performance and stock risk. By providing evidence on the effect of risk disclosures on nonprofessional investors' investment decision-making process, this study can help professional bodies and national market regulators understand how some market participants react to risk information provided under their regulations. In fact, the results indicate that there is little to be gained by firms voluntarily providing these risk disclosures. This would seem to support the fact that disclosure of risk information needs to be mandated by market regulators.

Citation

Fortin, A. and Berthelot, S. (2012), "MD&A Risk Disclosures and Nonprofessional Investors' Perceptions and Investment Decisions", Bobek Schmitt, D. (Ed.) Advances in Accounting Behavioral Research (Advances in Accounting Behavioural Research, Vol. 15), Emerald Group Publishing Limited, Leeds, pp. 1-28. https://doi.org/10.1108/S1475-1488(2012)0000015005