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Processing Fluency and Investors’ Reactions to Disclosure Readability

Journal of Accounting Research, Forthcoming

50 Pages Posted: 10 Jul 2011 Last revised: 2 Feb 2012

Kristina M. Rennekamp

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: February 1, 2012

Abstract

The SEC’s emphasis on the use of plain English is designed to make disclosures more readable and more informative. Using an experiment, I find that more readable disclosures lead to stronger reactions from small investors, so that changes in valuation judgments are more positive when news is good and more negative when news is bad. Drawing on research in psychology to explain this result, I predict and find that processing fluency from a more readable disclosure acts as a subconscious heuristic cue and increases investors’ beliefs that they can rely on the disclosure. While I do not find that more readable disclosures directly increase perceptions of management credibility, I do find evidence of an indirect effect operating through feelings of processing fluency. In supplemental analyses, I find that investors who receive more readable disclosures revise their valuation judgments to be less extreme when they are explicitly made aware of the potential for variation in readability. I discuss potential explanations for these revised valuation judgments.

Keywords: Readability, Plain English, Credibility, Voluntary Disclosure, Processing Fluency, Investment, Mechanical Turk

JEL Classification: C91, D83, G18, M41, M43, M44

Suggested Citation

Rennekamp, Kristina M., Processing Fluency and Investors’ Reactions to Disclosure Readability (February 1, 2012). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1881847 or http://dx.doi.org/10.2139/ssrn.1881847

Kristina M. Rennekamp (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

401P - Sage Hall
Cornell University
Ithaca, NY 14853
United States
607-255-0500 (Phone)

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