Financial statement users’ judgment and disaggregated tax disclosure

We investigate whether the effect on users’ judgment of the dis-/aggregation of line items on the face of financial statements is subject to users’ anchoring heuristics in an experimental setting. A firm’s financial performance, investment attractiveness, and tax position are judged in the absence or presence of disaggregated tax information in the statement of other comprehensive income (OCI). We do not find that such disaggregation affects users’ judgment, as long as the disaggregated amounts do not challenge the users’ anchor; however, when they do, judgments differ significantly. The results are consistent with anchoring effect theory: because financial statement complexity exceeds users’ limited cognitive processing capacity, users adjust their prior beliefs when the information received deviates strongly from anchor values. Our study contributes to the literature on impression management and on the effects of disclosure choices by exploring users’ susceptibility to the disaggregation of specific items in the face of financial statements. Our results are important for financial statement preparers, because they could consider the anchoring effect when choosing whether to disclose disaggregated line item information.