How Does Readability Influence Investors’ Judgments? Consistency of Benchmark Performance Matters
52 Pages Posted: 26 Oct 2011 Last revised: 9 Jul 2013
Date Written: July 8, 2013
We conduct an experiment to investigate how readability (high vs. low) and benchmark performance consistency (consistent vs. inconsistent) influence investors’ judgments. Using prior management guidance and year-ago quarter performance as two benchmarks against which to assess actual earnings performance, we manipulate whether performance evaluations relative to these two benchmarks are consistent with each other. Our findings show that readability has a magnified impact on investors’ performance judgments when benchmark performance is inconsistent than when it is consistent. We find that high readability improves investors’ understanding of the firm’s positive (negative) current period performance relative to year-ago quarter performance, and this leads to higher (or lower) performance judgment. We also find that readability influences disclosure credibility and performance judgment through processing fluency only in the absence of conflicting benchmark performance, but not in its presence. These findings provide insights on the mechanisms (i.e., understanding and processing fluency) through which readability influences investors’ judgments, and the conditions under which each operates.
Keywords: readability, benchmark performance consistency, trend performance understanding, processing fluency, performance judgment
JEL Classification: C91, G18, M41, M43, M44
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