Effects of Language Vividness and Explanation Plausibility on Nonprofessional Investors’ Reactions to Earnings Warnings

Abstract

It is increasingly important for managers to make effective corporate disclosures to investors. This study examines investors’ reactions to two qualitative features of earnings warnings: (1) vividness of language used in warnings and (2) plausibility of explanations used to explain forecasts. By adopting a 2  2 between-subjects experimental design, the authors find that investors forecast lower future performance and judge management as more trustworthy if warnings use vivid rather than pallid language and are accompanied by plausible rather than implausible management explanations. When management explanations are implausible, investors are not significantly affected by either vivid or pallid language.