An experimental investigation of dimensional precision in uncertainty disclosures related to revenue recognition

The purpose of this paper is to investigate how managerial disclosure of imprecise information about revenue recognition affects investors’ perceptions of corporate and management performance. Specifically, the authors focus on how outcome and probability dimensions and their respective (im) precision interact with each other and jointly affect investors’ judgments and decision-making.

The authors conducted an experiment where the dimensions are manipulated (outcome vs probability) of disclosed revenue recognition information and its related precision (a point vs a range estimate).

Results from this study suggest that participants are sensitive to specific dimensions of uncertainty disclosure: participants were highly aware of the (im)precision in outcome information, were more likely to invest when both dimensions were vague and expected higher revenue when dimensional precision was consistent.

The results imply that dimensional precision is an important component in uncertainty disclosure and may have a significant impact on investors’ judgments and decision making. Regulators and managers should consider dimensional imprecision when they develop and implement disclosure strategy regarding revenue recognition.

The results have practical value for regulators/managers, who are in the process of developing/implementing disclosure strategy regarding revenue recognition.

This is the first study to examine the interaction of dimensions of uncertainty in revenue disclosures.