Earnings-Announcement Narrative and Investor Judgment

Abstract

SYNOPSIS This study examines how emphasis framing in narrative disclosures, and the investor characteristics of numeracy and persuadability, affect investors' ability to discriminate between firms' better and worse financial performance. In an experiment with 264 participants from the general population, we manipulate emphasis framing in earnings announcement narratives as neutral, consistent, or inconsistent with the firm's performance. We find that investors are better able to distinguish between good and poor firm performance when the accompanying disclosure emphasizes information that is consistent with the firm's performance. Further, persuadability reduces, but numeracy increases, investors' ability to distinguish between good and poor performance. However, our results also indicate that the inclusion of biased numerical information in narrative disclosures may have a greater negative effect on higher numerates than on lower numerates, consistent with theory suggesting that more numerate individuals tend to focus on and draw affective meaning from numbers. JEL Classifications: M41.