The Effect of Disclosure Readability on Lending Decisions

• In Event: Disclosure Presentation Effects

Abstract

This paper examines the effect readability has on the perceived creditworthiness of borrowers. We find that reduced readability increases the likelihood that borrowers objectively deserving of an unfavorable credit rating will not receive one. We also find that the overall financial health of a borrower with low creditworthiness is viewed more favorably when the nonfinancial information the borrower provides possesses a low degree of readability. Additionally, when the readability of a borrower’s nonfinancial information is relatively low, the self-reported accuracy with which respondents understood the borrower’s nonfinancial information decreases. Finally, regarding affect, when participants received materials with a high degree of readability, respondents in conditions involving borrowers with low creditworthiness (as opposed to borrowers with high creditworthiness) reported higher levels of overall positive affect. This greater amount of positive affect was driven by lower levels of negative affect rather than higher levels of positive affect, a phenomenon potentially linked to emotional suppression employed by participants in their role as a loan officer.

Authors

• Lloyd Tanlu, Washington and Lee University

• David Shook, Washington and Lee University