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

H. Scott Asay, W. Brooke Elliott, Kristina Rennekamp

Research output: Contribution to journalArticlepeer-review


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.
Original languageEnglish (US)
Pages (from-to)1-25
Number of pages25
JournalAccounting Review
Issue number4
StatePublished - Jul 1 2017


  • Information processing
  • Information search
  • Readability
  • Voluntary disclosure

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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