The influence of narrative disclosure readability, information ordering and graphical representations on non-professional investors' judgment: evidence from an emerging market

Abstract

PurposeThis study examines whether manipulation in attributes of corporate narrative disclosures and the use of graphical representations can bias non-professional investors' judgment towards firms' future performance, in an emerging market context.Design/methodology/approachThe authors conduct three different experiments with a 2 × 2 between-subjects design, using accounting and finance senior undergraduate students to proxy for the non-professional investors.FindingsResults show that simple (more readable) disclosures improve non-professional investors' judgment towards firms' future performance. In addition, it is found that non-professional investors are prone to a recency effect from the intentional ordering of narrative information, when using complex (less readable) narratives. However, no primacy effect is found, when using simple (more readable) disclosures. The results further provide evidence that the inclusion of graphical representations, along with the manipulated narrative disclosures, can moderate the recency effect of information order, when using less readable and complex narrative disclosures.Research limitations/implicationsThe results reveal that although the content of corporate disclosures can be objective, neutral and relevant, manipulation in textual features and the use of graphical presentations, can interact to impact how non-professional investors perceive and process the disclosed information. This study provides an Egyptian evidence regarding this issue, as the majority of prior studies concentrate on developed capital markets. In addition, it contributes to prior studies evaluating the appropriateness of the Belief Adjustment Model predictions about the effect of textual presentation order on decision-making, by providing evidence from an emerging market.Practical implicationsResults attempt to increase the awareness of investors and encourage them to use multiple sources of information to avoid the probable bias that can result from management's manipulation of narratives. In addition, the study could be of interest to regulators and standard-setters, where the results reveal the need for guidelines and regulations to guide the disclosure of narrative information and the use of graphical information in corporate reports.Originality/valueTo the best of the authors' knowledge, this is the first study to examine the effect of two impression management strategies in narrative disclosures (readability and information order), along with the use of graphical representations, on non-professional investors' judgment in an emerging market, like Egypt.

The fog index in accounting research: contributions and challenges

“…focus on investor types (El-Sayed et al 2021) and may be suitable for disentangling information and obfuscation. For example, the association between the fog index of informative components of disclosure, as opposed to the fog index of obfuscating components for pre-defined investor types, could be examined.…”

“…Using natural experiments, Rennekamp (2012) finds that readability effects can be independent of ability because information clarity determines JAAR 24,2 processing fluency. This, in turn, impacts the related judgements and decisions (El-Sayed et al, 2021). Limited attention emphasises that salient facts are more easily gleaned by investors (Hirshleifer and Teoh, 2003).…”

“…( 5) Are natural experiments more powerful tests for addressing the underlying challenge of disentangling the informative components of disclosure from the obfuscating components? Natural experiments are designed to focus on investor types (El-Sayed et al, 2021) and may be suitable for disentangling information and obfuscation. For example, the association between the fog index of informative components of disclosure, as opposed to the fog index of obfuscating components for pre-defined investor types, could be examined.…”

“…Using natural experiments, Rennekamp (2012) finds that readability effects can be independent of ability because information clarity determines processing fluency. This, in turn, impacts the related judgements and decisions (El-Sayed et al. , 2021).…”

“…(5) Are natural experiments more powerful tests for addressing the underlying challenge of disentangling the informative components of disclosure from the obfuscating components? Natural experiments are designed to focus on investor types (El-Sayed et al. , 2021) and may be suitable for disentangling information and obfuscation.…”