Patterns of Language Use in Accounting Narratives and Their Impact on Investment-Related Judgments and Decisions

Abstract

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.

Managing Investors' Perception Through Strategic Word Choices in Financial Narratives

“…Investors from Eastern cultures, such as China, have a preference for and familiarity with concrete language, based on the prevalence of its use in these cultures. Therefore, while the U.S. investors in Riley et al () made more favorable investment judgments of a company when a negatively framed narrative was written with nouns/adjectives, the Chinese investors made more favorable investment judgments when that same negatively framed narrative was written using more verbs. Managers should be aware that the culture of their audience is going to influence how the narrative influences their judgments.…”

“…The takeaway for managers seems to be that if they have positive news to convey, they should write with more verbs; however, if they have negative news to convey, they are wise to do so using more nouns/adjectives, as investors will be less likely to punish the firm for this news. However, in an extension to Riley et al (2014), Yen, Riley, and Liao (2014) found the results only hold for investors from Western cultures, such as the United States. Investors from Eastern cultures, such as China, have a preference for and familiarity with concrete language, based on the prevalence of its use in these cultures.…”

“…By using different variations of the same root word, research has found that managers can influence investment decisions while holding constant the meaning of the narrative. Riley, Semin, and Yen (2014) found that when a narrative is written with mostly nouns/adjectives (i.e., abstract language), investors are equally likely to invest if the underlying economic news is either positive or negative. However, if the same narrative is written with mostly verbs (i.e., concrete language), there is a significant difference in investment decisions between positive and negative news narratives.…”

“… Please note that the terms concrete and abstract are defined differently in Riley et al () and Elliott et al (). …”

Codification vs. US GAAP Hierarchy: A Preliminary Study of the Accounting Lexicon Post-Codification

“…Davis et al (2011) analyze approximately 23,000 earning press releases using a measure of managers' net optimistic language and conclude that the measure is positively associated with future firm ROA. Finally, Riley et al (2014) demonstrates that positive (negative) financial information is associated with more concrete (abstract) language used in earnings press releases.…”