Investors ’ Susceptibility to Scale Compatibility Effects When Using Nonfinancial Measures

Investors and analysts share a desire for companies to publicly disclose forward-looking information. Nonfinancial measures (e.g., customer satisfaction) represent one form of forward-looking information that many companies voluntarily disclose (SEC 2001). In this paper, I examine judgment problems that investors encounter when they attempt to use nonfinancial measures. Using a taxonomy of " scale-types " to describe different presentations of nonfinancial measure disclosures (e.g., nominal, ordinal, interval, and ratio), I propose that investors are susceptible to scale compatibility effects. Such effects imply that an investor may rely more on a nonfinancial measure when its scale matches the scale the investor uses for his judgment, at the expense of an equally relevant measure whose scale does not match his judgment scale. I hypothesize that this judgment problem can be reduced when investors evaluate several values for the set of nonfinancial measures simultaneously. Results from my experiment support my hypothesis. This study represents an important step to derive guidance for externally reporting nonfinancial measures.