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توضیحات

Disclosure Readability and the Sensitivity of Investors’ Valuation Judgments to Outside Information

مقاله انگلیسی خوانایی افشا

خوانایی افشائیات و حساسیت ارزیابی سرمایه گذاران نسبت به اطلاعات خارجی

Assistant Professor
University of Iowa
scott-asay@uiowa.edu
W. Brooke Elliott
Professor and Roedgers Fellow in Accountancy
And Professor Ken Perry Faculty Fellow
University of Illinois at Urbana-Champaign
wbe@illinois.edu
Kristina M. Rennekamp
Assistant Professor
Cornell University
kmr52@cornell.edu
August 2016

Acknowledgements:

We thank Spencer Anderson, Eddy Cardinaels (editor), Mike Durney, Scott Emett, Stephanie Grant, Joseph Johnson, Tracie Majors, Mark Nelson, two anonymous reviewers, and workshop participants at the University of Iowa,

the 2014 ABO Conference, and the 2014 BYU Accounting Research Symposium for their helpful comments on earlier versionsof this paper.

Disclosure Readability and the Sensitivity of Investors’ Valuation Judgments
to Outside Information

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 the sensitivity of investors’ valuation judgments to the information contained in outside (i.e., non-firm) sources of information. Using an experiment,

we present investors with a disclosure containing mixed news about the valence of firm performance, and this disclosure varies in readability.

We find that investors who initially view a less readable firm disclosure provide valuation judgments that incorporate the outside information to a greater extent,

such that their valuation judgments are more sensitive to whether outside information is relatively more or less supportive of management’s positive forward-looking statements.

We find evidence that this occurs primarily because investors who view a less readable initial disclosure feel less comfortable evaluating the firm and, in turn, rely more on the outside information.

We also find that viewing a less readable firm disclosure indirectly increases the extent to which participants search outside information.

Combined, our results suggest that investors’ valuation judgments may be more influenced by outside sources of information when managers provide less readable firm disclosures,

potentially limiting the extent to which managers can benefit from strategically issuing less readable disclosures to obfuscate poor performance.

These findings also imply that investors might over-rely on more readable disclosures while discounting outside sources of information about the firm..