How does readability influence investors' judgments? Consistency of benchmark performance matters

• Main Authors: Zhou, Bo, Tan, Hun-Tong, Wang, Elaine Ying
• Other Authors: Nanyang Business School
• Format: Article
• Language: English
• Published: 2015
• Subjects: DRNTU::Business::Accounting
• Online Access: https://hdl.handle.net/10356/96782; http://hdl.handle.net/10220/25649
• Institution: Nanyang Technological University

We conduct two experiments to investigate how readability (high versus low) and benchmark performance consistency (consistent versus 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 the valence of guidance performance (positive or negative) and the valence of trend performance (positive or negative) are consistent with each other. We also manipulate the readability of trend performance in our main experiment. Our results show that when benchmark performance is inconsistent, higher as opposed to lower readability of positive (negative) trend performance leads to more (less) favorable investors' performance judgments. This effect of readability is smaller when benchmark performance is consistent. We also show that higher readability in the inconsistent benchmark performance condition improves investors' understanding of the firm's current-quarter performance, which in turn influences their judgments on the firm's future performance. In a supplementary experiment, we manipulate the readability of guidance performance in an inconsistent benchmark performance setting, and replicate the key finding that higher readability of positive guidance performance leads to more positive judgment on the firm's future performance.