Curbing opportunistic use of managerial materiality discretion: The impact of investor horizon and board gender diversity

This study explores the factors influencing managers’ discretionary materiality decisions in financial reporting, focusing on the role of institutional investors and Board of Directors (BoD) gender diversity. Given the judgmental nature of materiality assessments and the difficulty in detecting them, the study examines how different monitoring factors affect managers’ accuracy in classifying information as material. Using a 2 × 2 between-participants experimental design, we collected data involving 160 managers from four European countries. The experiment is based on the implementation of IAS 36 “Impairment of Assets”, and participants were asked to make materiality decisions under four conditions, varying institutional investors’ investment horizons (long-term vs. short-term) and BoD gender diversity (high vs. low women directors’ presence on the board). The results show that institutional investors with long-term investment horizons enhance managers’ willingness to consider information as material, due to their stronger monitoring. Furthermore, higher gender diversity on the board is associated with a greater likelihood that managers will judge information as material. Additionally, the results show that the positive effect of long-term institutional investors on materiality judgments is more pronounced when BoD gender diversity is low. By focusing on managers as key yet underexplored actors in the materiality decision-making process, this study contributes to the materiality literature and provides new insights into how institutional monitoring and board composition shape discretionary financial reporting choices.