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Too much information? UW study shows overreliance on ’unfiltered’ financial reports reduces inexperienced investors’ returns


Inexperienced investors can negatively affect their investment results by using “unfiltered” information from Securities and Exchange Commission filings, according to research conducted at the University of Washington.

Frank Hodge, accounting associate professor at the University of Washington’s Foster School of Business, and colleagues surveyed 414 non-professional investors to examine their relative use of unfiltered versus analyst-filtered information. One of the first studies to examine the relationship between investors’ information choices and their returns, the results linked investors’ portfolio returns to their years of investing experience.

According to Hodge, the study results emphasized the negative impact of using unfiltered financial information without sufficient investment experience. “We discovered that less experienced investors did not have the savvy to recognize which financial information was relevant to making good financial decisions,” he said.

Newer investors initially rely heavily on filtered information, such as Value Line analyst reports, to make investment decisions. When they access unfiltered information in the form of balance sheets or SEC filings, they must interpret relevant numbers and learn arcane finance terms.

Study authors caution investors with little experience not to overestimate their financial statement analysis abilities, especially early in their investment careers. This advice is particularly relevant given the recent influx of relatively inexperienced equity investors and recent legislation requiring firms to disclose additional, often complex, financial information to market participants. “If people are going to invest in individual stocks, they should make sure they understand the financial information,” said Hodge. “Is it credible? Has it been audited? If you don’t understand or you don’t know where to look, then you may be misled by the information that is presented in very aggregated form on the financial statements.”

The pool of non-professional investors is growing and so are the stakes, as more Americans become responsible for their own retirement investing. According to the Association and Investment Company Institute, 91.1 million individuals, or nearly half of all U.S. households, owned mutual funds or individual stocks in 2005 -- a three-fold increase since 1983. Recent changes in Securities and Exchange Commission regulations have provided non-professional investors with unprecedented access to detailed financial information, with the intent of helping them make informed decisions.

The study also shows that access to unfiltered information was increasingly valuable for investors who know how to interpret it. “As investors gain experience and develop ‘financial templates’ to compile relevant information, their returns usually increase beyond the level of investors who use primarily filtered information,” Hodge explained. And for investors with the most experience who used unfiltered information, they actually earned higher returns the more they used it.

Published in Contemporary Accounting Research, the study was authored by Hodge and colleagues W. Brooke Elliott and Kevin E. Jackson of the University of Illinois at Urbana-Champaign. The authors surveyed 414 investors from the National Association of Investors Corporation, a sample group that reflects the general population of American investors.


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