Recent work in the archival accounting literature investigates disclosure readability (Li , You and Zhang ) and its effects on the behavior of small investors (Miller ). In my paper, Processing Fluency and Investors’ Reactions to Disclosure Readability, forthcoming in the Journal of Accounting Research, I use a controlled experiment to provide complementary evidence and to address questions that cannot be answered with archival data. I find that, holding constant length and information content, more readable disclosures lead to stronger reactions from investors, so that changes in investors’ valuation judgments are more positive when news is good and more negative when news is bad. Consistent with prior literature in psychology, I find that participants are more likely to feel as though they can rely on a disclosure that is more readable, and that this effect is mediated by processing fluency. Processing fluency represents how easy it feels to process a given piece of information, and is often subconsciously treated as a heuristic cue that information can be relied upon when making related judgments. In my study, the greater reliance on news (be it good or bad) helps to explain the stronger reactions to more readable disclosures that I observe, even though readability does not lead to significant differences in the actual information that participants are able to gather from the press release. Counter to my predictions, I do not find that disclosure readability directly affects perceptions of management credibility. However, I do find evidence of an indirect effect operating through feelings of processing fluency.
Editor’s Note: The following post comes to us from Kristina Rennekamp of the Department of Accountancy at the University of Illinois at Urbana-Champaign.