| This study is an experiment designed to investigate the extent to which public disclosure of auditor materiality thresholds affects both (1) investors' perception of the auditor's report and (2) market behavior. My design is a 2 x 2 between-subjects factorial design, where I manipulate the auditor materiality thresholds (i.e., 5% and 10%), and the disclosure-nondisclosure of the auditor materiality thresholds. The hypotheses are based on the economic theory of market efficiency and the cognitive psychology theory of over- and underconfidence (Griffin & Tversky 1992; Bloomfield, Libby, & Nelson 1999). My results suggest that disclosing auditor materiality thresholds increases the accuracy of investors' perception of the auditor's report by reducing investors' overconfidence. When investors' perceptions were more accurate, their forecasts of asset values and asset prices were closer to the economic predictions and investors' profits were more uniformly distributed. Hence, my results suggest that these experimental markets are more efficient when auditor materiality thresholds are disclosed as investors are more able to price protect themselves. |
