Debiasing scale compatibility effects when investors use nonfinancial measures to screen potential investments

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Abstract

Screening potential investments involves dividing a set of companies into those that are suitable to consider for investment and those that are less desirable (Kinder 2005). In this paper, I document that nonprofessional investors (represented by MBA students) are susceptible to scale compatibility effects when implementing an investment screen using nonfinancial measures. Such effects occur when investors rely more on a scale-compatible, nonfinancial measure whose values directly map into investors' judgements than on an equally relevant but scale-incompatible measure whose values do not map into their judgements. Results from an experiment indicate that investors reduce their susceptibility to scale compatibility effects when they simultaneously screen several companies for potential investment. Because screening investments involves screening several companies, simultaneous screening represents an efficient mechanism to debias scale compatibility effects.

Original languageEnglish (US)
Pages (from-to)803-826
Number of pages24
JournalContemporary Accounting Research
Volume25
Issue number3
DOIs
StatePublished - Jan 1 2008

Keywords

  • Investment screen
  • Nonfinancial
  • Nonprofessional investors
  • Scale compatibility
  • Simultaneous

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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