Colbert, Gary, Murray, Dennis and Nieschwietz, Robert.
Journal of Finance and Accountancy, Volume 4, pp. 1-13.

This study investigates whether the usefulness of expected values to financial statement users depends on portfolio size (N). Given that standard setting boards require some liabilities to be measured at fair value, and given that fair values are often estimated using expected cash flows, the investigation is conducted within the context of liabilities. Expected value is hypothesized to be more useful when N is large because actual cash flow realizations are more centered on their expected value than when N is small. That is, because users will perceive that expected values are more accurate predictors of actual realizations when N is large, valuations assigned to liabilities will be closer to their expected values than when N is small. The results show that when N is large, the valuations assigned by subjects to liabilities are much closer to the expected value of the future cash outflows than when N is small, but users’ perceptions of the accuracy of expected values did not appear to influence their valuations. These results suggest that standard setters should give consideration to the effect of portfolio size on the use of expected value in financial reporting.