Do Managers Benefit from Providing Less Readable Disclosures of Poor Performance

• In Event: Investor Reactions to Management Disclosures

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 access independent sources of information and weight that information in subsequent judgments and decisions. Using an experiment, we find some evidence that investors who view a less readable disclosure are more likely to access independent sources of information because they feel less confident in their ability to evaluate the firm. We also find that investors who view a less readable firm disclosure weight that independent information more heavily in their valuation judgments because they view management as being less credible. As a result, these investors’ valuation judgments are more sensitive to whether the independent sources of information support or refute management’s positive forward-looking statements. When investors do not seek out independent sources of information, valuation judgments are more negative overall when a firm provides a less readable disclosure of poor performance. Combined, our results suggest that managers may not benefit from strategically obfuscating poor performance by making disclosures less readable.

Authors

• Hamilton Scott Asay, university of iowa

• Wynter Brooke Elliott, University of Illinois-Urbana-Champaign

• Kristina Rennekamp, University of Illinois-Urbana-Champaign