Who Believes the Hype? An Experimental Examination of How Language Affects Investor Judgments

Authors

  • JEFFREY HALES,

    1. Georgia Institute of Technology. We appreciate helpful comments from Philip Berger (Editor), an anonymous reviewer, Brooke Elliott, Max Hewitt, Susan Krische, Nick Seybert, Lori Shefchik, Malavika Shetty, and workshop participants at Florida State University, the Georgia Institute of Technology, the University of Oklahoma Conference on Decision Making Research in Accounting, the 2010 AAA Annual Meeting, and the 2010 IAREP/SABE/ICABEEP Annual Meeting. We are grateful to the College of Management at Georgia Tech for financial support.
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  • XI (JASON) KUANG,

    1. Georgia Institute of Technology. We appreciate helpful comments from Philip Berger (Editor), an anonymous reviewer, Brooke Elliott, Max Hewitt, Susan Krische, Nick Seybert, Lori Shefchik, Malavika Shetty, and workshop participants at Florida State University, the Georgia Institute of Technology, the University of Oklahoma Conference on Decision Making Research in Accounting, the 2010 AAA Annual Meeting, and the 2010 IAREP/SABE/ICABEEP Annual Meeting. We are grateful to the College of Management at Georgia Tech for financial support.
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  • SHANKAR VENKATARAMAN

    1. Georgia Institute of Technology. We appreciate helpful comments from Philip Berger (Editor), an anonymous reviewer, Brooke Elliott, Max Hewitt, Susan Krische, Nick Seybert, Lori Shefchik, Malavika Shetty, and workshop participants at Florida State University, the Georgia Institute of Technology, the University of Oklahoma Conference on Decision Making Research in Accounting, the 2010 AAA Annual Meeting, and the 2010 IAREP/SABE/ICABEEP Annual Meeting. We are grateful to the College of Management at Georgia Tech for financial support.
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ABSTRACT

This paper investigates the effect of vivid language on investor judgments. Recent research finds that investor judgments are significantly influenced by disclosure tone (positive versus negative). Holding tone constant, we investigate investors’ reactions to vivid versus pallid information. Drawing on theories from psychology, we predict that investors will be sensitive to the differences between vivid and pallid language when the underlying information is preference inconsistent, but not when the information is preference consistent. Results of two experiments support our prediction. Vivid language significantly influences the judgment of investors who hold contrarian positions (i.e., short investors in a bull market and long investors in a bear market). Interestingly, vivid language has limited influence on the judgment of investors who hold positions consistent with the general tenor of the market. Our results provide evidence regarding when vividness matters and when it does not in financial contexts, thereby contributing to both psychology and a growing literature on disclosure tone in financial reporting. In addition, our results also speak to concerns raised by regulators and academics asserting that vivid language can inflate bubbles and incite panics.

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