INFORMATION OVERLOAD AND INDIVIDUAL INVESTORS’ PERCEPTIONS OF INVESTMENT RISK: EVIDENCE FROM SAUDI ARABIA

Authors

  • Aref M. Eissa Department of Accounting, College of Business Administration, Majmaah University, Al-Majmaah, 11952, Saudi Arabia & Faculty of Commerce, Cairo University, Giza, Egypt
  • Ahmed Diab Department of Accounting, Prince Sultan University, Riyadh, Saudi Arabia & Beni-Suef University, Beni-Suef, Egypt
  • Meshal Obaid Almutairi Department of Accounting, College of Business Administration, Majmaah University, Al-Majmaah, 11952, Saudi Arabia
  • Amr N. Abdelrhman Department of Accounting, Faculty of Commerce, Cairo University, Egypt

DOI:

https://doi.org/10.33736/ijbs.6890.2024

Keywords:

Information Overload, Investment Risk, Annual Report Complexity, Earnings Manipulation, KSA

Abstract

This study explores investors’ perceptions of investment risk under information overload. We use a survey of 133 individual investors in the Kingdom of Saudi Arabia (KSA), and to test our hypotheses, we employ descriptive statistics and sample t-test. We found that information overload in lengthy annual reports decreases investors’ confidence in the financial statements and reduces their ability to understand the firm’s business and financial performance. Investors confirmed that information overload reduces their ability to access relevant information for making investment decisions and predict future performance, and increases uncertainty about the firms’ future performance. Consequently, information overload increases investors’ perceptions of firms’ investment risk, reduces their confidence to invest in firms with long and difficult-to-read annual reports, and increases their perceptions of the likelihood that these reports are being exploited by managers to hide poor performance or earnings manipulation, and consequently, they prefer not to invest in these firms. In addition, the results indicated that disclosure complexity along with information overload exacerbates investors’ negative perceptions about the firm’s investment risk and its performance. Our results provide insights for investors in emerging markets such as the Saudi market to understand the negative implications of information overload, which can enlighten their investment decisions.

References

Alm El-Din, M. M. A., El-Awam, A. M., Ibrahim, F. M., & Hassanein, A. (2022). Voluntary disclosure and complexity of reporting in Egypt: The roles of profitability and earnings management. Journal of Applied Accounting Research, 23(2), 480-508.

https://doi.org/10.1108/JAAR-09-2020-0186

Al‐Razeen, A., & Karbhari, Y. (2004). Users' perception of corporate information in Saudi Arabia: An empirical analysis. International Journal of Commerce and Management, 14(3/4), 41-57.

https://doi.org/10.1108/10569210480000183

Al-Sehali, M., & Spear, N. (2004). The decision relevance and timeliness of accounting earnings in Saudi Arabia. The International Journal of Accounting, 39(2), 197-217.

https://doi.org/10.1016/j.intacc.2004.02.004

Asay, H. S., Elliott, W. B., & Rennekamp, K. M. (2017). Disclosure readability and the sensitivity of investors' valuation judgments to outside information. The Accounting Review, 92(4), 1-25.

https://doi.org/10.2308/accr-51570

Athanasakou, V., Eugster, F., Schleicher, T., & Walker, M. (2020). Annual report narratives and the cost of equity capital: UK evidence of a U-shaped relation. European Accounting Review, 29(1), 27-54.

https://doi.org/10.1080/09638180.2019.1707102

Baiman, S., and Verrecchia, R. (1996). The relation among capital markets, financial disclosure, production efficiency, and insider trading. Journal of Accounting Research, 34(1), 1-22.

https://doi.org/10.2307/2491329

Beerbaum, D. (2016). Disclosure overload: A literature review. Working paper, Aalto University School of Business. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2669135 (Accessed February 22, 2024).

https://doi.org/10.2139/ssrn.2669135

Bernales, A., Valenzuela, M., & Zer, I. (2021). Effects of information overload on financial market returns: How much is too much? Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3904916 (Accessed February 22, 2024).

https://doi.org/10.2139/ssrn.3904916

Boubakri, N., & Mishra, D. R. (2017). Information overload and cost of equity capital. Asian Finance Association. Working paper, Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2931362 (Accessed February 22, 2024).

https://doi.org/10.2139/ssrn.2931362

Casey, C. J. (1980). Variation in accounting information load: The effect on load officers' predictions of bankruptcy. The Accounting Review, 55(1), 36-49.

Cazier, R. A., & Pfeiffer, R. J. (2016). Why are 10-K Filings So Long? Accounting Horizons, 30 (March), 1-21.

https://doi.org/10.2308/acch-51240

CFA Institute (2013). Financial Reporting Disclosures: Investor Perspectives on Transparency, Trust, and Volume. Report. Charlottesville: CFA Institute.

Chan, S. Y. (2001). The use of graphs as decision aids in relation to information overload and managerial decision quality. Journal of Information Science, 27(6), 417- 425.

https://doi.org/10.1177/016555150102700607

Chapman, K. L., Reiter, N., White, H. D., & Williams, C. D. (2019). Information overload and disclosure smoothing. Review of Accounting Studies, 24(4), 1486-1522.

https://doi.org/10.1007/s11142-019-09500-4

Chapman, K., Reiter, N., White, H., & Williams, C. (2018). Information overload and disclosure smoothing. Working paper, Hawai'i Accounting Research Conference (HARC).

Chung, D. Y., Hrazdil, K., Novak, J., & Suwanyangyuan, N. (2019). Does the large amount of information in corporate disclosures hinder or enhance price discovery in the capital market? Journal of Contemporary Accounting & Economics, 15, 36-52.

https://doi.org/10.1016/j.jcae.2018.12.001

Chung, D., Hrazdil, K., & Suwanyangyuan, N. (2016). Disclosure quantity and the efficiency of price discovery: Evidence from the Toronto Stock Exchange. Review of Accounting and Finance, 15(2), 122-143.

https://doi.org/10.1108/RAF-06-2015-0081

Coles, J., Loewenstein, U., & Suay, J. (1995). On equilibrium pricing under parameter uncertainty. The Journal of Financial and Quantitative Analysis, 30, 347-374.

https://doi.org/10.2307/2331345

CPA Canada. (2015). Five Steps to Simplifying Financial Statements Today. Chartered Professional Accountants of Canada.

Daugherty, B., Dickins, D., Hatfield, R., & Higgs, J. (2012). An examination of partner perceptions of partner rotation: Direct and indirect consequences to audit quality. Auditing: A Journal of Practice and Theory, 31(1), 97-114.

https://doi.org/10.2308/ajpt-10193

De Franco, G., Hope, O-K., Vyas, D., & Zhou, Y. (2015). Analyst report readability. Contemporary Accounting Research, 32(1), 76-104.

https://doi.org/10.1111/1911-3846.12062

De Medeiros, O. R., & Quinteiro, L. G. D. (2005). Disclosure of accounting information and stock return volatility in Brazil. Working paper, University of Brasilia.

https://doi.org/10.2139/ssrn.835726

Deloitte. (2010). Swimming in words: Surveying narrative reporting in annual reports. Available at, https://www.iasplus.com/en/binary /uk/1010ukswimminginwords.pdf.

Dhaliwal, D., Li, O. Z., & Tsang, A. (2011). Voluntary nonfinancial disclosure and cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86(1), 59-100.

https://doi.org/10.2308/accr.00000005

Easley, D. & O'Hara, M. (2004). Information and the cost of capital. The Journal of Finance, 59(4), 1553-1583.

https://doi.org/10.1111/j.1540-6261.2004.00672.x

Eaton, T. V., John, R. N., & Weaver, D. G. (2007). Disclosure and the cost of equity in international cross-listing. Review of Quantitative Finance and Accounting, 29, 1-24.

https://doi.org/10.1007/s11156-007-0024-0

Ebaid, I. E. S. (2016). International accounting standards and accounting quality in code-law countries: The case of Egypt. Journal of Financial Regulation and Compliance, 24(1), 41-59.

https://doi.org/10.1108/JFRC-12-2011-0047

FASB. (2012). Disclosure framework. Discussion paper, Financial Accounting Standards Board (FASB).

FASB. (2014). Proposed Statement of Financial Accounting Concepts, Conceptual Framework for Financial Reporting. Chapter 8: Notes to Financial Statements, Financial Accounting Standards Board (FASB), File reference No. 2014-200.

FRC. (2009). Louder than Words, Principles and Actions for Making Corporate Reports Less Complex and More Relevant. Financial Reporting Council (FRC), London, June.

FRC. (2012). Thinking about Disclosure in a Broader Context. Financial Reporting Council, London, October.

Habbash, M., & Alghamdi, S. (2017). Audit quality and earnings management in less developed economies: the case of Saudi Arabia. Journal of Management & Governance, 21, 351-373.

https://doi.org/10.1007/s10997-016-9347-3

Hail, L., & Leuz, C. (2006). International differences in the cost of equity capital: Do legal institutions and securities regulation matter? Journal of Accounting Research, 44, 485-531.

https://doi.org/10.1111/j.1475-679X.2006.00209.x

Hassan, O. (2010). Disclosure measurement in the empirical accounting literature: A review article. Unpublished doctoral dissertation, Department of Economics and Finance, School of Social Sciences, Brunel University Uxbridge, London.

https://doi.org/10.2139/ssrn.1640598

Hoberg, G., & Lewis, C. (2017). Do fraudulent firms produce abnormal disclosure? Journal of Corporate Finance, 43, 58-85.

https://doi.org/10.1016/j.jcorpfin.2016.12.007

Hodge, F. D. (2003). Investors' perceptions of earnings quality, auditor independence, and the usefulness of audited financial information. Accounting Horizons, 17(1), 37-48.

https://doi.org/10.2308/acch.2003.17.s-1.37

IASB. (2013). Joint effort needed to tackle disclosure problem. Available at, https://www.ifrs.org/news-and-events/2013/01/joint-effort-needed-to-tackle-disclosure-problem/.

IASB. (2016). Better communication. IFRS Foundation Conference, Zurich. Available at, https://www.ifrs.org/-/media/feature/news/speeches/2016/hans-hoogervorst-better-communication-june-2016.pdf

IFRS Foundation. (2017). IFRS around the world. Jurisdictional profile: Saudi Arabia, February 2017. Retrieved from http://www.ifrs.org/-/media/feature/around-theworld/ jurisdiction-profiles/saudi-arabia-ifrs-profile.pdf

Impink, J., Paananen, M., & Renders, A. (2021). Regulation‐induced disclosures: Evidence of information overload? Abacus, 58(3), 432-478.

https://doi.org/10.1111/abac.12246

Ittner, C. D., Larcker, D. F., & Rajan, M. V. (1998). Are non-financial measures leading indicators of financial performance? An analysis of customer satisfaction. Journal of Accounting Research, 36(Supplement), 1-36.

https://doi.org/10.2307/2491304

Johnson, L. T. (1992). Research on disclosure. Accounting Horizons, 6, 101-110.

Kamel, H., & Shahwan, T. (2014). The association between disclosure level and cost of capital in an emerging market: Evidence from Egypt. Afro-Asian J. Finance and Accounting, 4(3), 203-223.

https://doi.org/10.1504/AAJFA.2014.064173

Kouaib, A., & Amara, I. (2022). Corporate social responsibility disclosure and investment decisions: Evidence from Saudi indexed companies. Journal of Risk and Financial Management, 15(11), 495.

https://doi.org/10.3390/jrfm15110495

KPMG. (2011). Disclosure overload and complexity: Hidden in plain sight. Available at, http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/disclosure-overload-complexity.pdf

Kristandl, G., & Bontis, N. (2007). The impact of voluntary disclosure on cost of equity capital estimates in a temporal setting. Journal of Intellectual capital, 8(4), 577-594.

https://doi.org/10.1108/14691930710830765

Lambert, R., Leuz, C., and Verrecchia, R. E. (2007). Accounting information, disclosure, and the cost of capital. Journal of Accounting Research, 45(2), 385-420.

https://doi.org/10.1111/j.1475-679X.2007.00238.x

Lawrence, A. (2013). Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), 130-147.

https://doi.org/10.1016/j.jacceco.2013.05.001

Levy, H. B. (2018). Overcoming disclosure overload and achieving greater disclosure effectiveness. The CPA Journal, March.

Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45, 221-247.

https://doi.org/10.1016/j.jacceco.2008.02.003

Li, H. (2019). Repetitive disclosures in the MD&A. Journal of Business Finance and Accounting, 46(9-10), 1063-1096.

https://doi.org/10.1111/jbfa.12405

Lo, K., Ramos, F., & Rogo, R. (2017). Earnings management and annual report readability. Journal of Accounting and Economics, 63(1), 1-25.

https://doi.org/10.1016/j.jacceco.2016.09.002

Luft, J., & Shields, M. (2002). Learning drivers of financial performance: Judgment and decision effects of financial measures, nonfinancial measures, and statistical models. Working paper, Michigan State University.

Miller, B. (2010). The effects of reporting complexity on small and large investor trading. The Accounting Review, 85(6), 2107-2143.

https://doi.org/10.2308/accr.00000001

Möllers, T. M. J., & Kernchen, E. (2010). Information overload at the capital market. Working paper, Europa E DirittoPrivato.

Morgenson, G. (2016). FASB proposes to curb what companies must disclose. The New York Time, Jan (2).

Morunga, M., & Bradbury, M. E. (2012). The impact of IFRS on annual report length. AABFJ, 6(5), 47-62.

Muslu, V., Radhakrishnan, S., Subramanyam, K. R., & Lim, D. (2015). Forward-Looking MD&A disclosures and the information environment. Management Science, 61, 931-948.

https://doi.org/10.1287/mnsc.2014.1921

Nagarajan, N., Srinidhi, J. B., & Yu, X. (2017). Readability of financial disclosures and the cost of raising equity capital. Working Paper, University of Texas at Arlington.

Oloveira, L., Rodrigues, L. L., & Craige, R. (2013). Stakeholder theory and the voluntary disclosure of intellectual capital information. International Journal of Governance, 3(1), 1-20.

Ormin, K. P., & Musa, J. (2016). International financial reporting standards adoption and financial reporting information overload: Evidence from Nigerian banks. GSTF Journal on Business Review (GBR), 4(4), 55-63.

https://doi.org/10.5176/2251-1997_AF16.13

Paredes, T. A. (2003). Blinded by the light: Information overload and its consequences for securities regulation. Washington University Law Review, 81(2), 417-485.

https://doi.org/10.2139/ssrn.413180

Pomeranz, F. (2000). A partial answer to accounting information overload. EDPACS, 27(9), 1-8.

https://doi.org/10.1201/1079/43255.27.9.20000301/30315.1

Schick, A. G., Gordon, L. A., & Haka, S. (1990). Information overload: A temporal approach. Accounting, Organizations and Society, 15(3), 199-220.

https://doi.org/10.1016/0361-3682(90)90005-F

Sekaran, U., & Bougie, R. (2016). Research Methods for Business: A Skill Building Approach. 7th Edition. John Wiley & Sons.

Trading economics (2021), Saudi Arabia GDP Growth Rate. https://tradingeconomics.com/saudiarabia/gdp-growth. (Accessed 30/10/2021).

White, M. (2013). The path forward on disclosure. Speech presented at the National Association of Corporate Directors, National Harbor, MD. Available at, http://www.sec.gov/News/Speech/Detail /Speech/1370539878806#.Uzx2VPldV8E.

White, M. J. (2016). Chairman's address at SEC speaks -"Beyond disclosure at the SEC in 2016". Securities and Exchange Commission. Available at, https://www.sec.gov/news/speech/white-speech-beyond-disclosure-at-the-sec-in-2016-021916.html.

World Bank (2009), "Corporate governance country assessment, Kingdom of Saudi Arabia", Report on Observance of Standards and Codes (ROSC) Program.

You, H., & Zhang, X. (2009). Financial reporting complexity and investor under reaction to 10-K information. Review of Accounting Studies, 14(4), 559-586.

https://doi.org/10.1007/s11142-008-9083-2

Zhou, S., Simnett, R., & Green, W. (2017). Does integrated reporting matter to the capital market? Abacus, 53(1), 94-132.

https://doi.org/10.1111/abac.12104

Downloads

Published

2024-04-04

How to Cite

Aref M. Eissa, Ahmed Diab, Meshal Obaid Almutairi, & Amr N. Abdelrhman. (2024). INFORMATION OVERLOAD AND INDIVIDUAL INVESTORS’ PERCEPTIONS OF INVESTMENT RISK: EVIDENCE FROM SAUDI ARABIA . International Journal of Business and Society, 25(1), 49–67. https://doi.org/10.33736/ijbs.6890.2024