The Inconsistent Effects of Plain English Disclosures on Nonprofessional Investors’ Risk Judgments

Jennifer Riley and Eileen Taylor
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Jennifer Riley: College of Business Administration, University of Nebraska Omaha, Omaha, NE 68182, USA
Eileen Taylor: Poole College of Management, North Carolina State University, Raleigh, NC 27695, USA

IJFS, 2018, vol. 6, issue 1, 1-17

Abstract: In this paper, we examine whether the readability of different types of corporate risk disclosures influences the risk judgments of nonprofessional investors. Our study contributes evidence to the Security and Exchange Commission’s ongoing initiative to improve corporate financial statement disclosures. Using 359 responses from an experimental survey of nonprofessional investors (NPIs), we find that readability, in conjunction with risk factor type, significantly influences investors’ judgments of probability and size of economic loss, cause for worry, and overall risk. NPIs judged the risk from an industry-related risk factor (competition) to be higher when written in plain English, but judged the risk of a company-specific risk factor (internal control weakness over financial reporting) to be higher when written in a less readable format (i.e., legalese). We found no significant differences in judgments between plain English and less readable language on a combined industry/company risk factor, information security. Results suggest that a move to plain English for all types of risk factors may have consequences that are not fully understood or expected. This area needs further research before regulators enact (or enforce) mandates for risk factors to be presented in plain English.

Keywords: plain English; readability; risk factor disclosures; item 1a; nonprofessional investors (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2018
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