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Int. J. Financial Stud. 2018, 6(1), 25; https://doi.org/10.3390/ijfs6010025

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

1
College of Business Administration, University of Nebraska Omaha, Omaha, NE 68182, USA
2
Poole College of Management, North Carolina State University, Raleigh, NC 27695, USA
*
Author to whom correspondence should be addressed.
Received: 19 December 2017 / Revised: 14 February 2018 / Accepted: 22 February 2018 / Published: 2 March 2018
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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. View Full-Text
Keywords: plain English; readability; risk factor disclosures; item 1a; nonprofessional investors plain English; readability; risk factor disclosures; item 1a; nonprofessional investors
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
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Riley, J.; Taylor, E. The Inconsistent Effects of Plain English Disclosures on Nonprofessional Investors’ Risk Judgments. Int. J. Financial Stud. 2018, 6, 25.

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