Probability expressions and ambiguity: An experimental study of disclosure perceptions for contingent liabilities

This paper examines whether and how financial statement users react differently when financial statement information is accrued than when it is disclosed in the footnotes to the financial statements. This is the first study to focus on contingent liability information in an experimental context. Einhorn and Hogarth's ambiguity model (1985) provides a theoretical framework for designing and interpreting empirical tests that investigate whether perceived levels of ambiguity depend on where in the financial statements contingent liabilities are disclosed. Additional tests focus on perceived levels of usefulness of contingency information, where usefulness is defined in terms of perceived relevance and reliability. Subjects are asked to make an investment decision based on a mock set of financial statements. Subjects then judge the perceived ambiguity and usefulness of the financial statement information during their decision-making process. Results indicate that subjects do not react to ambiguity as described by Einhorn and Hogarth. Results also indicate that users find accrued information more reliable than information disclosed solely in the notes to the financial statements, however, the evidence does not support the hypothesis that users perceive accrued information as more relevant than information disclosed in the footnotes.