Defensive Communication and Personal Pronouns in Internal Control Disclosure

• In Event: Responses to Audit Outcomes and Disclosures

Abstract

With the increasing attention from regulators, investors, and analysts on the effectiveness of companies’ internal control over financial reporting (ICFR), it is important to understand how an ICFR report affects its recipients’ perceptions of the company and management. We conduct an experiment to examine the joint effect of two linguistic aspects of an ICFR report—how defensive the report sounds and whether it contains first person plural pronouns (such as “we”)—on investors’ judgment and decision-making. We find that investor judgments and decisions will be most favorable when management makes a less defensive argument and does not use first-person pronouns, compared to when management makes a more defensive argument or uses first-person pronouns. Additional analyses show that when first-person pronouns are absent, the effect of defensiveness on investor decisions is partially mediated by the perceived adequacy of management’s explanation for the material weakness and the effort that investors believe management will put into remediating the material weakness. Our study has both theoretical and practical implications.

Authors

• Yao Yu, University of Massachusetts-Amherst

• Matthew Wayne Starliper, Texas A&M University - Corpus Christi