Recent research has examined the role of accounting narratives on investors' judgments and decisions. This study extends this line of inquiry by examining the effects of language categories on investors' judgments and decisions—the notion that narratives written with different predicates (verbs versus adjectives/nouns) will have a differential effect on investors. We use a language classification system, the Linguistic Category Model (LCM), to identify linguistic categories that vary on the dimension of abstractness/concreteness. First, the validity of the LCM in an accounting context is tested by analyzing quarterly earnings press releases. Results show that the language in press releases is more concrete (abstract) when the associated financial information is positive (negative). Second, an experiment to examine the effect of language categories on investors' judgments and decisions is conducted. The findings indicate that investors are least (most) likely to invest when a negatively (positively) valenced narrative is written concretely.
Although accounting is typically seen as a numbers-oriented discipline, with an emphasis on quantifying economic events and activity, the nexus of language and accounting, specifically the role of language in communicating corporate accounting results, has received an increasing amount of attention in recent years. This is because quantified accounting results (e.g., earnings per share, sales revenue) are rarely communicated in isolation. Rather, they are usually accompanied by a non-quantitative narrative, such as an earnings press release, a corporate annual report, or the president’s letter, which, along with conference calls and content at corporate websites, we collectively refer to as “accounting narratives.” These narratives allow management to elaborate on and contextualize the financial performance of the company. However, because they are not as extensively regulated as the financial statements and are not standardized, these narratives can also be used by companies for impression-management purposes, to obfuscate (poor) performance and to “spin” the financial results to the companies’ favor. Research into accounting narratives dates back to 1952 and has focused on a wide variety of features of narratives and on how those features affect financial statement readers’ (most notably, investors’) reactions. The earliest studies focused on accounting narratives’ readability by performing a syntactic analysis to assess the cognitive difficulty of written passages. This line of research has found that accounting narratives are syntactically complex and difficult to read and that management intentionally makes bad news less readable in order to strain the readers’ cognitive processes and lead to lower comprehension of the bad news. In addition to this evidence of obfuscation, researchers have found support for managers engaging in attributional framing, which is the tendency to attribute positive outcomes to actions within the company and negative outcomes to actions external to the company (e.g., the government or the weather) in an effort to influence readers’ perception of good versus bad news. More recently, researchers have found that managers use syntactic (sentence structure), semantic (word meaning), and metasemantic (abstract versus concrete construal) manipulation and make broad stylistic choices such as emphasis, length, and scenario form. In terms of how those features affect the readers of the narratives, readers (most notably, investors) have been shown to respond to length and readability; level of negativity; words pertaining to risk, uncertainty, credibility, commitment, and responsibility; justifications of excuses of poor performance; optimistic and pessimistic tone; vivid versus pallid language; internal versus external attributions; and use of self-references.
Purpose The purpose of this paper is to investigate whether investor reactions to accounting narratives are uniform across cultures or if there are predictable systematic culture-based differences, particularly for investors from interdependent cultures, such as in Asia. Design/methodology/approach This research paper builds on the experiment conducted in Riley et al. (2014) by collecting data from investors from interdependent cultures and comparing their investment judgments to the “baseline” judgments of the investors from Riley et al. (2014). Findings In comparing independent and interdependent culture investors, a culture by construal interaction is observed. Whereas the independent culture investors in Riley et al. (2014) made less favorable investment judgments of a company with a concretely (vs abstractly) written negative narrative, this effect is attenuated for interdependent culture investors. Research limitations/implications This study extends the literature on accounting narratives by providing evidence that investors’ culture and linguistic characteristics of accounting narratives “interact,” suggesting that future studies in this area should account for culture as a variable. As for limitations, the independent and interdependent participant data were predominantly collected from different universities, so the differences observed may be due to institutional, not cultural differences. However, the populations are matched on key demographic measures. Practical implications The results have practical implications for investor relations professionals and international standard-setting bodies. Originality/value This study is believed to be the first to examine how investors’ culture may affect their reactions to the features of accounting narratives.
In this paper, I examine the analytical review judgments of staff-level auditors. Heiman (1988) finds that students do not perform as well as senior-level auditors when performing certain analytical review procedures. I conduct an experiment based on Heiman (1988, 1990) to examine the analytical review judgments of those individuals who fall in between the two groups studied by Heiman—staff-level auditors who have some full-time experience, but are not yet at the senior level. I find that staff-level auditors' judgments are similar to the senior-level auditors' judgments observed in Heiman (1990). The results provide evidence about the readiness of staff-level auditors to perform certain analytical review procedures, which has staffing implications for audit firms looking to maximize audit efficiency without sacrificing audit effectiveness. The results also provide insights about the transition of an auditor from novice to expert. Data Availability: Available upon request.
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