Uncertainty And Measurement In Accounting PDF Download

Accounting estimates are measured with varying degrees of uncertainty, and financial statement disclosures provide investors with information about such uncertainty. In two experiments, I test investors' reactions to measurement uncertainty in accounting estimates. In the first experiment, I find that investors exhibit uncertainty aversion in this context. Consequently, increasing uncertainty decreases the strength of investors' reactions to estimates that reveal good news, but increases the strength of reactions to estimates that reveal bad news. In the second experiment, I find that investment horizon moderates investors' uncertainty aversion, such that negative reactions to uncertainty are stronger for short-horizon investors and weaker for long-horizon investors. I also provide evidence of the psychological mechanism underlying these horizon-based differences in sensitivity to uncertainty. Results suggest that a short investment horizon causes investors to focus on more concrete details of the information they evaluate, including the measurement uncertainty associated with accounting estimates.