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Jeffrey Hales, associate professor of accounting
Jeffrey Hales, associate professor of accounting
Jason Kuang, associate professor of accounting
Jason Kuang, associate professor of accounting
Shankar Venkataraman, assistant professor of accounting
Shankar Venkataraman, assistant professor of accounting

Study: Vivid Language in Reports Affects Investor Judgments

In recent years, regulators have raised concerns that vivid language used by media and others in the financial community can inflate stock market bubbles and induce panics.

Georgia Tech researchers have shown that such language can indeed influence investor behavior in the study “Who Believes the Hype: An Experimental Examination of How Language Affects Investor Judgments.”

Published in the Journal of Accounting Research, the study was conducted by Georgia Tech associate accounting professors Jeffrey Hales and Jason Kuang with assistant accounting professor Shankar Venkataraman.

“Because words are inherently less objective than numbers, concerns have been raised that subjectivity in language gets used (or abused) in ways that unduly influence the behavior of investors and exacerbate swings in investor sentiment during bear and bull markets,” they write.

The researchers examined how experimental participants reacted to financial reports, analyst forecasts and news flashes using either vivid language (that which is emotionally interesting, concrete, and image provoking) or pallid verbiage (bland, sterile, and less emotionally charged). The subjects were assigned to forecast growth of companies described in these ways.

“Companies with positive performance might be described as ‘shattering’ or ‘blowing away’ rather than ‘exceeding’ analyst expectations. Growth may be described as ‘explosive’ as opposed to ‘strong,’” according to the researchers.

They discovered that investors are most sensitive to the effects of vivid language if the information presented is contrary to their preference (for example, short investors in a bull market hearing extremely positive news about a company’s prospects).

“We see that vivid language affects investor sentiment by making it harder for short investors to hold pessimistic beliefs about the prospects of the company,” note the researchers.

However, long investors in a bull market who hear financial news consistent with their views behave similarly whether the language was phrased vividly or pallidly, the study shows.

These results are consistent with previous research findings showing that people often accept information that is consistent with their preferences at face value without in-depth thinking.

But they expend much more mental effort scrutinizing information that is contrary to their views. Therefore, vivid language might have more impact on these people because they tend to scrutinize it more closely, according to the researchers.












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