A Behavioral Accounting Framework for Retail Investor Interpretation of Financial Disclosures: Evidence from Mutual Fund Allocation Patterns

Understanding how retail investors interpret accounting disclosures is central to advancing accounting theory, particularly in contexts characterized by heightened market uncertainty. The study develops a behavioral accounting framework that explains how financial performance and risk disclosures shape retail investors’ cognitive processing, risk framing, and subsequent investment allocation decisions. Drawing on behavioral theories such as loss aversion, recency bias, and herding, the framework proposes a set of theoretical propositions linking disclosure attributes to observable shifts in asset allocation across risk categories. Market-level mutual fund allocation patterns are used illustratively to examine the behavioral consistency of the proposed framework across different market conditions. The study contributes to theoretical accounting research by integrating behavioral insights into disclosure interpretation, offering implications for accounting standard setters, regulators, and practitioners concerned with improving the design and communication of financial information.