Who Believes the Hype? An Experimental Examination of how Language Affects Investor Judgments

50 Pages Posted: 30 Aug 2010

See all articles by Jeffrey Hales

Jeffrey Hales

University of Texas at Austin - Department of Accounting

Xi (Jason) Kuang

Georgia Institute of Technology - Scheller College of Business

Shankar Venkataraman

Bentley University - McCallum Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 27, 2010

Abstract

This paper investigates the effect of vivid language on investor judgments. Recent research finds that investor judgments are significantly influenced by disclosure tone (positive versus negative). Holding tone constant, we investigate investors’ reactions to vivid versus pallid information. Drawing on theories from psychology, we predict that investors will be sensitive to the differences between vivid and pallid language when the underlying information is preference-inconsistent, but not when the information is preference-consistent. Results of two experiments support our prediction. Vivid language significantly influences the judgment of investors who hold contrarian positions (i.e., short investors in a bull market and long investors in a bear market). Interestingly, vivid language has limited influence on the judgment of investors who hold positions consistent with the general tenor of the market. Our results provide evidence regarding when vividness matters and when it does not in financial contexts, thereby contributing to both psychology and a growing literature on disclosure tone in financial reporting. In addition, our results also speak to concerns raised by regulators and academics asserting that vivid language can inflate bubbles and incite panics.

Keywords: Language, Tone, Vividness, Investor Judgment

JEL Classification: C91, M41, D80

Suggested Citation

Hales, Jeffrey and Kuang, Xi (Jason) and Venkataraman, Shankar, Who Believes the Hype? An Experimental Examination of how Language Affects Investor Judgments (August 27, 2010). Available at SSRN: https://ssrn.com/abstract=1667244 or http://dx.doi.org/10.2139/ssrn.1667244

Jeffrey Hales (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-2163 (Phone)
512-471-3907 (Fax)

Xi (Jason) Kuang

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St., NW
Atlanta, GA 30308-1149
United States

Shankar Venkataraman

Bentley University - McCallum Graduate School of Business ( email )

Waltham, MA 02452-4705
United States

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