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

50 Pages Posted: 19 Sep 2014 Last revised: 9 Aug 2016

H. Scott Asay

University of Iowa - Department of Accounting

W. Brooke Elliott

University of Illinois at Urbana-Champaign

Kristina M. Rennekamp

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: August 16, 2016

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.

Keywords: voluntary disclosure, readability, information search, information processing

Suggested Citation

Asay, H. Scott and Elliott, W. Brooke and Rennekamp, Kristina M., Disclosure Readability and the Sensitivity of Investors’ Valuation Judgments to Outside Information (August 16, 2016). Available at SSRN: https://ssrn.com/abstract=2497697

Hamilton Scott Asay (Contact Author)

University of Iowa - Department of Accounting ( email )

S232 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

W. Brooke Elliott

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Kristina M. Rennekamp

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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