The Effect of Risk Disclosure Readability on Nonprofessional Investors

• In Event: Investor Reactions to Management Disclosures

Abstract

Proponents tout plain English as a solution for improving communication of complex information to users in various areas of business, medicine, and law. The SEC’s mandate to public companies to use Plain English in their Item 1a risk factor disclosures to make them more readable is one example. Using 365 responses from an experimental survey of nonprofessional US investors, we find that readability significantly influences investors’ perceptions of probability and size of loss, economic worry, and overall risk. Further, these effects interact with type of risk factor. Readability does not appear to influence investment decisions or perception of management credibility. Finally, we find that investors report that they do not use item 1a risk factors in their investment analyses in practice. Results suggest that this area needs further research before future mandates for plain English and risk factor disclosures are enacted.

Authors

• Jennifer (Blaskovich) Riley, University of Nebraska-Omaha

• Eileen Z Taylor, North Carolina State University