How Does Readability Influence Investors’ Judgments? Consistency of Benchmark Performance Matters

52 Pages Posted: 26 Oct 2011 Last revised: 9 Jul 2013

See all articles by Hun-Tong Tan

Hun-Tong Tan

Nanyang Technological University (NTU) - Division of Accounting

Elaine Wang

University of Massachusetts Amherst

Bo Zhou

Shanghai University of Finance and Economics

Date Written: July 8, 2013

Abstract

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

Suggested Citation

Tan, Hun-Tong and Wang, Elaine (Ying) and Zhou, Bo, How Does Readability Influence Investors’ Judgments? Consistency of Benchmark Performance Matters (July 8, 2013). Available at SSRN: https://ssrn.com/abstract=1888970 or http://dx.doi.org/10.2139/ssrn.1888970

Hun-Tong Tan (Contact Author)

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

Elaine (Ying) Wang

University of Massachusetts Amherst ( email )

Amherst, MA 01003-4910
United States
413-545-7613 (Phone)

Bo Zhou

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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