Investors' Reactions to Management Disclosure Corrections : Does Presentation Format Matter?

Disclosure of material earnings-relevant information through corporate and news websites is increasingly popular, and so is the frequency of corrections to initial disclosures made. The formats adopted for such corrections differ in terms of the placement of the erroneous disclosure relative to the original disclosure, as well as the presence or absence of a forewarning of correction. We conduct an experiment to investigate whether erroneous earnings-related disclosures that are subsequently corrected by management continue to influence individual investors' judgments, and whether this effect is moderated by the format of the correction. Using M.B.A. students as proxies for investors, we conduct an experiment involving a context where a firm announces the negotiation outcome of a major contract, and then subsequently corrects this announcement. For a correction format where the erroneous disclosure is placed before the correction, participants' assessments of the likelihood of winning the contract and the firm's earnings potential/investment attractiveness continue to be influenced by the erroneous disclosure, despite the presence of a correction. For such correction formats where the erroneous disclosure is placed before the correction, presence of a warning of a correction before they read the erroneous disclosure does not mitigate the effect. Our experimental results provide some support that a correction format where the correction is placed prior to the erroneous disclosure reduces the influence of the erroneous disclosure