Disclosure Descriptors: Helping Investors Process Complex Accounting Estimates by Using Short Identical Descriptors

Companies can use either identical or different descriptors to refer to the same item throughout their disclosures, and such descriptors can vary in length. We conduct three experiments in the setting of complex accounting estimate disclosures to examine how descriptor length and descriptor identicalness affect investors’ information processing and their investment judgments. We manipulate descriptor length (short versus long) in Experiment 1 and descriptor identicalness (identical versus non-identical) in Experiments 2 and 3. We also manipulate, in all experiments, whether managers’ estimate choices are consistent or inconsistent with their incentives to boost reported earnings. Consistent with our predictions, we find descriptor length affects information acquisition and descriptor identicalness affects information integration. Consequently, only when managers use short and identical descriptors, do investors assess lower credibility and indicate lower investment willingness for estimate choices that are incentive consistent versus inconsistent. Our study provides important insights to accounting researchers, practitioners, and regulators.