An ex ante test of the Jenkins Committee disclosure recommendations

This study tests whether the new disclosures recommended by the American Institute of Certified Public Accountants Special Committee on Financial Reporting (Jenkins Committee) affect users’ investment decisions. The business reporting model developed by the Jenkins Committee adds two new broad types of disclosures to current reporting requirements; (1) high-level operating data and performance measures and (2) more forward-looking information. Financial Accounting Standards Board Chairman Beresford, among others, has called for further research examining the recommendations of the Jenkins Committee. This research tests the assertion that these new reporting requirements are useful in making investment decisions. Using a computer process tracing research methodology and an experimental simulation, the researcher provided subjects with a self-designed company information system to examine interactively and use to make an investment decision. Subjects also reported their decision confidence as well as perceived usefulness of information. Additionally, the computer tracing program directly recorded information order, usage. and time. Seven different information groups were used in this simulation and three main tests were performed: an examination of the information usefulness of the Jenkins Committee information, a comparison of the investment decision and decision confidence across groups, and a determination of the relationship between self-reported information usefulness and actual information usage. The results of the above analysis show that the Jenkins information is accessed heavily in the investment decision. Also, the users report that the new information is important in making their decisions. While both the forward-looking information and operational data appear to be useful to investors, the forward-looking information was accessed for longer periods of time and was perceived as being more useful than the operational data. Additionally, the subjects receiving the Jenkins information invested significantly higher amounts than those that did not. Finally, a moderate relationship was found between the subjects’ perceived usefulness and the time that information was used. An investment decision model based on time provided more explanatory power into the amount invested than a model based on subject perceptions. Two major contributions of this research are that it provides a behavioral, ex ante test of the new disclosure recommendations rather than an archival, ex post test. and it uses a computer tracing methodology in an experimental simulation. A strong demand exists for ex ante research. Also, the computer tracing program, written by the researcher, gathers evidence objectively and unobtrusively on information usage, order. and time to provide a better understanding of the investment decision process than other types of research methods. Considerable interest surrounds the new proposed disclosures and the general information needs of users. The findings of this study should be of interest to accounting practitioners, business groups such as the Financial Executives Institute, academicians, the Jenkins Committee, and accounting standard setters.