The Effect of Transaction Cost Unbundling on Investors' Reliance on Investment Research: Evidence from Experimental Asset Markets

Experimental Asset Markets: Behaviour and Bubbles

SSRN Electronic Journal ◽

10.2139/ssrn.2575597 ◽

2015 ◽

Cited By ~ 2

Author(s):

Owen Powell ◽

Natalia Shestakova

Keyword(s):

Asset Markets ◽

Experimental Asset Markets

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The Effect of Misstatements on Decisions of Financial Statement Users: An Experimental Investigation of Auditor Materiality Thresholds

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2002.21.1.11 ◽

2002 ◽

Vol 21 (1) ◽

pp. 11-27 ◽

Cited By ~ 32

Author(s):

Brad Tuttle ◽

Maribeth Coller ◽

R. David Plumlee

Keyword(s):

Economic Condition ◽

Accounting Information ◽

Critical Factor ◽

Financial Statement ◽

Asset Markets ◽

Market Prices ◽

Financial Misstatements ◽

Experimental Asset Markets ◽

Financial Misstatement ◽

Materiality Thresholds

Auditors are faced with the dilemma of inferring materiality based, in part, on whether a given level of financial misstatement will affect the decisions of statement users. Misstatements in accounting information that are below the materiality threshold are not expected to change users' assessments of a company's economic condition. While the auditing profession accepts materiality in concept, its application in practice is more controversial. In certain settings, the nature of a misstatement, such as changing a small profit into a loss, may affect an auditor's materiality judgment. However, in many cases the magnitude of the misstatement is a critical factor in judging materiality. We focus solely on the issue of magnitude and examine whether financial misstatements that are at or below commonly applied materiality thresholds result in market prices that differ from those resulting from correctly stated information. We conduct a series of 12 experimental asset markets each consisting of 12 independent three-minute trading periods with six traders in each market. We then compare prices for companies generated by markets that are provided either correctly stated information, information containing misstatements that would typically be considered immaterial, or information containing material misstatements. Results indicate that undisclosed misstatements within materiality thresholds that are consistent with current audit practice do not affect market prices, while misstatements well above these thresholds do.

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