Losing Control of the Narrative: How Less Readable Disclosures Drive Investors to Outside Information

• In Event: Deceptive Language in Reporting

Abstract

Prior literature suggests that investors react less strongly to information in less readable disclosures. We extend this literature by considering how disclosure readability affects investors’ propensity to acquire outside sources of information and incorporate that information in subsequent judgments and decisions. Using an experiment, we present investors with a disclosure containing mixed news about the valence of firm performance that varies in readability. We find evidence that investors who view a less readable disclosure are more likely to access, search and encode the content of outside information. This occurs because they feel less comfortable evaluating the firm and, in turn, their valuation judgments are more sensitive to whether outside sources of information support or refute management’s positive forward-looking statements. When investors do not pursue outside sources of information, valuation judgments are more negative overall when a firm provides a less readable disclosure containing mixed news. Combined, our results suggest that investors may be more influenced by outside sources of information when managers provide less readable firm disclosures, potentially limiting managers’ ability to control the narrative provided to investors.

Authors

• Hamilton Scott Asay, The University of Iowa

• Kristina Rennekamp, Cornell University

• Wynter Brooke Elliott, University of Illinois at Urbana–Champaign