How Do Investors Assess the Credibility of Management Disclosures?

Abstract

This paper synthesizes the existing literature on disclosure credibility and identifies four factors that investors consider when assessing the credibility of a management disclosure: (1) situational incentives at the time of the disclosure, (2) management's credibility (i.e., competence and trustworthiness), (3) the levels of external and internal assurance, and (4) characteristics of the disclosure itself. Disclosure credibility tends to be higher when management has few incentives to mislead investors and/or is perceived to be competent and trustworthy. Validation by external or internal sources also can enhance a disclosure's credibility. Moreover, disclosure credibility is influenced by various characteristics of the disclosure itself, such as its precision, venue, timing, inherent plausibility, and amount of supporting information.