We report the results of two experiments that provide evidence that investors' risk judgments are affected by the numerical format used to describe outcomes within accounting disclosures. Consistent with prior research in psychology, investors assess higher risk in response to dollar-formatted disclosures than to equivalent percentage-formatted disclosures. Consistent with the Persuasion Knowledge Model (Friestad and Wright 1994), this effect is moderated when investors have both (1) awareness that management has discretion over format, and (2) sufficient cognitive capacity to consider its implications. Our results provide insight about the effects of current disclosure formats and suggest implications for managers who choose formats, investors who interpret formatted information, and regulators who consider whether to further prescribe the formats that are used in financial disclosures.

This paper examines how the reversibility of the accounting effect of asset impairments affects managers' investment decisions. We conduct two experiments in which participants act as CEO of a multi-division electronics company that suffers a large asset impairment at one of the divisions. Drawing on prior psychology research involving cognitive dissonance and decision reversibility, we predict and find that managers who are responsible for the decision to record the asset impairment invest more in the impaired division when the accounting effect of the impairment is reversible than when it is irreversible. This is consistent with the idea that reversible accounting effects encourage behavioral attempts to alter the cash flow outcome, while irreversible accounting effects encourage belief revision to rationalize the cash flow outcome. Also in line with cognitive dissonance theory, we show that managers who are not responsible for the decision to impair the asset, or managers who are given the opportunity to deny responsibility for the asset impairment, do not differ in their investment in the impaired division, regardless of impairment reversibility.