The Effect of a Cautionary Notice on Investors' Reactions to More and Less Readable Disclosures

45 Pages Posted: 7 Jan 2016 Last revised: 21 Jun 2018

See all articles by Lisa Koonce

Lisa Koonce

University of Texas

Zheng Leitter

Nanyang Technological University

Brian J. White

University of Texas at Austin - Department of Accounting

Date Written: June 13, 2018

Abstract

Managers appear to strategically use discretion over disclosure language to reduce the effect of bad news and/or amplify the effect of good news. We test how a cautionary notice highlighting management’s discretion over disclosure language affects investors’ reactions to more and less readable disclosures. We find that a cautionary notice causes investors to reduce their valuation and investment desirability judgments when readability is consistent with management’s incentives—that is, when bad news disclosures are less readable and when good news disclosures are more readable—but not when readability is inconsistent with a strategic motivation. Our results should be informative to regulators, given their interest in both promoting more readable disclosures and protecting investors.

Keywords: readability, disclosure, cautionary notice, investors, skepticism

Suggested Citation

Koonce, Lisa L. and Leitter, Zheng and White, Brian J., The Effect of a Cautionary Notice on Investors' Reactions to More and Less Readable Disclosures (June 13, 2018). Available at SSRN: https://ssrn.com/abstract=2711542 or http://dx.doi.org/10.2139/ssrn.2711542

Lisa L. Koonce

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

Zheng Leitter

Nanyang Technological University ( email )

Nanyang Business School
Department of Accounting
Singapore, 639798
Singapore

Brian J. White (Contact Author)

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

Austin, TX 78712
United States

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