Asymmetric Investor Materiality and the Effects of Disclosure

Abstract

We broaden our understanding of investor materiality, finding it to be asymmetrical for good and bad news. Motivated by legal and standards-based materiality definitions, we consider both participants' stated materiality limits and investment judgments, as well as the effect of auditors' materiality disclosures on those judgments. The study employs a 3 × 2 experiment manipulating materiality disclosure (high or low materiality number or no disclosure) and gain or loss subsequent events of equal magnitude. Absent disclosure, non-professional investors report lower materiality thresholds than typical auditor limits, and they exhibit lower materiality levels for bad news relative to good news both in their stated preferences and investment decisions. We find that disclosure reduces the distance between user and auditor materiality and eliminates the asymmetry in investors' stated materiality levels. However, disclosure fails to attenuate asymmetry in investment decisions, suggesting materiality preferences are “sticky” and difficult to affect through disclosure.