Asay 2018 Disclosure PDF

Journal of Accounting and Economics 65 (2018) 380–398
Contents lists available at ScienceDirect
Journal of Accounting and Economics

journal homepage: www.elsevier.com/locate/jae
Firm performance, reporting goals, and language choices in

T
narrative disclosures☆
⁎
H. Scott Asaya, Robert Libbyb, Kristina Rennekampb,
a
The University of Iowa, United States
b
Cornell University, United States
AR TI CLE I NF O
Keywords: We use an experiment with experienced managers to provide more-direct evidence on how re-
Textual analysis porting goals and firm performance influence language choices. We find that bad news dis-
Readability closures are less readable than good news, but only when managers have a stronger self-en-
Narrative disclosure language hancement motive. Our results suggest that this difference is driven mainly by attempts to write
Causal explanation
more readable good news reports as opposed to intentional obfuscation of poor performance. In
order to frame poor performance in a positive light, managers also focus more on the future,
provide causal explanations for poor performance, and use more passive voice and fewer per-
sonal pronouns.
1. Introduction
Prior work suggests that the linguistic characteristics of narrative disclosures vary with firm performance. For example, when
performance is poor, earnings announcements, 10-Ks, and other narrative disclosures tend to be less readable (see, e.g., Jones and
Shoemaker, 1994; Li, 2010 for discussions), include additional explanations for performance (Merkley, 2014; Guay et al., 2016;
Bushee et al., 2018), and use more future-oriented words (Li, 2008; Matsumoto et al., 2011). Further, it has been suggested that
managers may choose to use language that highlights their contribution to good performance (e.g., active voice, first-person pro-
nouns, etc.) and downplays their contribution to poor performance (e.g., passive voice, third-person pronouns, etc.).1 Implicit in these
studies is the idea that managers’ reporting goals shape these linguistic choices.
We provide more-direct evidence on how reporting goals influence managers’ language choices by using an experiment that
independently varies both the sign of firm performance and the strength of self-enhancement motives, while holding constant the
environmental complexity that prior literature has suggested may also influence linguistic characteristics of disclosures (Merkley,
2014; Guay et al., 2016; Bushee et al., 2018). Stronger self-enhancement motives induce a reporting goal to make the firm appear
more favorable. By manipulating whether self-enhancement motives are relatively weak or strong as well as the sign of the news, we
can directly test whether stronger self-enhancement motives lead to greater or smaller differences in the linguistic characteristics of
good and bad news disclosures. Further, we can determine whether these changes result from how managers report good news, bad
news, or both. For example, managers with a stronger self-enhancement motive might decrease the readability of bad news in an
☆
We thank Randy Beatty, Rob Bloomfield, Sarah Bonner, Doug DeJong, Ken Merkley, Tracie Majors, Bill Mayew, Greg Miller, Terence Ng, Mark Nelson, Hun-Tong
Tan, participants at the 2016 Cornell Summer Accounting Camp, and workshop participants at the University of Bern, University of Southern California and Nanyang
Technological University for comments on earlier versions of this paper. We also thank Mike Durney and Patrick Witz for expert research assistance.
⁎
Corresponding author.
E-mail addresses: scott-asay@uiowa.edu (H.S. Asay), rl54@cornell.edu (R. Libby), kmr52@cornell.edu (K. Rennekamp).
1
For example, see Chafe and Danielewicz (1987), Hyland (2005), Reilly et al. (2005) and Asay et al. (2018).
https://doi.org/10.1016/j.jacceco.2018.02.002
Received 7 November 2016; Received in revised form 15 February 2018; Accepted 26 February 2018
Available online 27 February 2018
0165-4101/ © 2018 Elsevier B.V. All rights reserved.
H.S. Asay et al. Journal of Accounting and Economics 65 (2018) 380–398
attempt to obfuscate poor performance (Bloomfield, 2002; Li, 2008) and increase the readability of good news in an attempt to
present good news more clearly. Similarly, managers with a stronger self-enhancement motive might make other language choices in
order to communicate additional information when reporting poor performance (e.g., providing a more detailed explanation for past
performance and discussion of future plans). Thus, our study allows us to gain additional insight into how firm performance and
reporting goals affect disclosure readability and other linguistic features. We also provide some evidence on the intentionality of, and
motives for, these linguistic choices, which is of interest given the mixed evidence in prior work.2 We rely on evidence from our
primary experiment, a supplemental experiment, and an additional survey.
In our primary experiment, experienced managers assume they are in charge of investor relations for a hypothetical firm and that
they have been asked to draft a report explaining its performance to investors. In a 2 × 2 between-subjects design, we manipulate (1)
firm performance in the most recent quarter (good or bad) and (2) participants’ reporting goal (unbiased or favorable).3 We then
examine the effects of these manipulations on disclosure readability and other linguistic features of the disclosure (use of first person
pronouns and passive voice, causal explanations, and focus on the future). We also directly ask participants about the reports they
have written to provide evidence on the intentionality of their linguistic choices. First, consistent with prior archival evidence, we
find that bad news reports are less readable than good news reports. This effect is driven by an increase in the readability of good
news reports when participants have a favorable reporting goal, rather than a decrease in the readability of bad news reports. We also
find that neither the valence of performance nor the reporting goal affects participants’ perceptions of the readability of their own
reports, or their ratings of the extent to which they were motivated to make the report easier or more difficult to read. Second, we find
that participants use more passive voice and fewer first person singular pronouns (e.g., “I”, “me”) when news is bad – techniques that
distance a manager from the information being conveyed. Further, the increased use of passive voice is particularly true when
participants have a favorable reporting goal. Third, we find that participants use more words that reflect causal thinking (e.g.,
“because”, “effect”, “therefore”) and use more future tense relative to past tense when news is bad than when news is good. When
directly asked, participants accurately report that they increase the use of causal and future words when news is bad, although they
also believe that the use of these words is even greater when a favorable reporting goal is present.
In our supplemental experiment, we examine the robustness of our results by testing how the linguistic features of bad news
disclosures are influenced by an alternative operationalization of the self-enhancement motive – portraying the performance in the
least unfavorable manner as possible. This alternative reporting goal reduces the readability of disclosures when performance is poor,
as a result of increased use of negations (e.g., saying a firm is “not doing well” rather than “doing poorly”). However, we find that this
alternative reporting goal does not affect participants’ perceptions of the readability of their own reports. In combination, the results
of our supplemental experiment suggest that although managers appear to be unaware that they are doing so, they provide dis-
closures that are less readable (via increased use of negations) when performance is poor and they have a goal to present the firm in
the “least unfavorable” light possible.4 Results also provide additional support for the idea that, in order to frame poor performance in
a positive light, managers tend to focus more on the future, provide causal explanations for poor performance, and use more passive
voice and fewer personal pronouns.
Finally, in an additional survey of managers, we summarize the characteristics of the performance reports prepared in our
primary experiment and ask participants to provide their opinions on factors that drove the characteristics of the performance
reports. Survey participants primarily believe that (1) managers intentionally write more readable reports when performance is good
with the objective of highlighting positive performance, and (2) managers intentionally provide more causal explanations for past
performance and more information about future plans when performance is bad in order to satisfy investors’ demand. In contrast, the
survey provides much more limited evidence that participants believe managers intentionally write less readable reports when
performance is bad with the objective of hiding poor performance. Moreover, when participants were asked to assume they were a
manager that had to describe some poor performance in their firm, a majority of participants indicated that they would choose to
issue a more readable disclosure rather than a less readable disclosure.5 Accordingly, our survey provides additional evidence sug-
gesting that managers attempt to write more readable reports when disclosing good performance, provide additional useful in-
formation when disclosing poor performance, and that differences in readability between good news and bad news disclosures are
unlikely driven by intentional obfuscation of poor performance.
Our study capitalizes on the comparative advantage of experiments (Libby et al., 2002) and complements prior work by testing
hypotheses that would be difficult to test using archival data. For example, examining how self-enhancement motives affect the
linguistic characteristics of disclosures would be difficult in real-world disclosure settings because managers generally have strong
motives to present the firm favorably (i.e., it would be hard to find situations where firms have weak self-enhancement motives for
comparison). Also, by holding information content constant in our experiments, we control for underlying differences in firm cir-
cumstances or environmental complexity which are likely to be confounded with firm performance and reporting goals in a natural
2
We discuss some of this mixed evidence further in Section 2.1.
3
In both reporting goal conditions, all participants are instructed to report the division's performance accurately. However, in the favorable reporting goal con-
dition, we introduce a stronger self-enhancement motive by layering on the additional explicit goal of portraying the performance in a manner that is as favorable as
possible.
4
It is also possible that participants did not want to admit to having done so, but this possibility is unlikely given that our manipulations were done between
participants. The combination of results discussed in Section 4.2 of the paper and the additional survey results further suggest this is an unlikely alternative explanation
for our findings.
5
The disclosure options presented to participants in the survey were not labeled as more or less readable. Instead, participants were just shown two possible
disclosures (which varied in readability), and indicated which they would choose to provide.
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setting. This allows us to complement prior archival work and disentangle the effects of firm performance and reporting goals from
the effects of environmental complexity, all of which are likely to be confounded in a natural setting. Our experiments also eliminate
potential effects of other parties (e.g., legal counsel, etc.) on the attributes of the narratives, which may again explain some of the
differences documented in archival studies. This allows us to focus on the manager's contributions to the narratives independent of
these filters. In the experiments, we ask participants to prepare open-ended reports rather than to just respond to scaled questions.
This is more analogous to how disclosures would be prepared in the real world, and allows us to use textual analysis measures similar
to those used in archival studies.
The remainder of the paper is organized as follows. We provide background and develop hypotheses in Section 2. We discuss the
experimental method we employ for our primary experiment in Section 3 and discuss its results in Section 4. Section 5 describes our
supplemental experiment and its results. Section 6 describes results of our independent survey of experienced managers. We sum-
marize and conclude in Section 7.
2. Background and development of hypotheses
At its core, language is a social construct. The vast sociolinguistics literature describes how individuals’ linguistic choices reveal
their social-psychological processes and vary with personal and environmental circumstances (Gee, 1999; Pennebaker et al., 2003). In
a financial reporting context, prior research suggests that the linguistic characteristics of narrative disclosures are likely to vary with
firm performance (for reviews, see Jones and Shoemaker, 1994; Li, 2010). In this section, we consider how managers’ reporting goals
combine with firm performance to influence disclosure readability and other linguistic characteristics of narrative disclosures.
2.1. Disclosure readability
Prior literature has shown that disclosures are less readable when firm performance is poor. Using a sample of 60 U.S. firms,
Subramanian et al. (1993) examine how readability of the Chairman's Letter varies with firm performance. They find that readability
is significantly higher for the firms where performance improves over the prior period rather than deteriorates. However, other pre-
2003 studies do not find evidence that readability varies with performance (e.g., Courtis, 1986; Jones, 1988; Clatworthy and
Jones, 2001). Rutherford (2003) argues that early (pre-2003) readability studies should be interpreted cautiously because they rely
on “small samples of tests, testing of limited amounts of text, and the application of weak tests of association.” Li (2008) provides the
first large-sample evidence on the issue and finds that firms with higher earnings have more readable annual reports. Further, when
performance is positive, firms with more readable annual reports have more persistent positive earnings.
Much of the accounting literature assumes that less-readable bad news disclosures result from a conscious attempt by manage-
ment to obfuscate bad news (for reviews, see Jones and Shoemaker, 1994; Li, 2008). Recent research in accounting supports the idea
that intentional obfuscation of bad news may be a useful strategy for managers and finds evidence consistent with the prediction that
investors react less strongly to less readable disclosures.6 However, archival studies generally cannot differentiate between strategies
that involve obfuscating bad news or clarifying good news, which would produce a similar pattern of results.
In addition, it is possible that bad news leads managers to make other linguistic choices that affect disclosure readability even in
the absence of intentional obfuscation (Bloomfield, 2008). For example, Bushee et al. (2018) find that, while there is some evidence
of intentional obfuscation in conference calls, there is also evidence that managers’ linguistic complexity is driven by providing more
discussion of firm information, and that this portion of linguistic complexity reduces information asymmetry. Guay et al. (2016) find
that financial statement complexity is strongly associated with additional voluntary disclosure. They also find that firms that are
affected by new accounting standards also respond with increases in voluntary disclosures. This again supports the idea that firms
respond to difficult circumstances with additional disclosures which reduce information asymmetry.7 Combined, the literature
provides evidence that bad news disclosures are likely to have different linguistic characteristics than good news disclosures even
when managers do not try to obfuscate poor performance.
Whether managers are intentionally issuing less readable disclosures when performance is poor, attempting to provide more
information to explain poor performance and reduce information asymmetry, and/or attempting to clarify the meaning of good news,
disclosures of bad performance will be less readable than disclosures of good performance. Also, if this behavior is driven by self-
enhancement motives, the difference in readability will be larger when managers have a stronger self-enhancement motive. Our first
hypothesis is therefore:
H1a. Managers will prepare less readable disclosures of bad performance than of good performance.
H1b. The difference between the readability of disclosures of good and bad performance will be greater when managers have a stronger self-
enhancement motive.
Our first hypothesis predicts that differences in readability between good and bad news disclosures will be larger as self-en-
hancement motives get stronger, but we do not make ex ante predictions about the specific pattern of responses to a shift in the
6
Recent examples include You and Zhang (2009), Miller (2010), Rennekamp (2012), Lawrence (2013), Tan(2015) and Koonce et al. (2016).
7
This literature also suggests that bad news disclosures can be less readable than good news disclosures because the business environment related to poor per-
formance is inherently more complex (see, e.g., Bloomfield, 2008; Guay et al. 2016; Bushee et al. 2018). As we discuss in Sections 3.3 and 7, we design our experiment
to hold constant the complexity of the underlying causes of good vs. poor performance. As a consequence, we cannot assess the influence of this factor.
382
strength of self-enhancement motives. However, our tests allow us to examine whether managers respond to a stronger self-en-
hancement motive by decreasing the readability of bad news disclosures and/or increasing the readability of good news disclosures.
We also do not make ex ante predictions as to the intentionality of managers’ disclosure readability decisions, but we do ask par-
ticipants debriefing questions to better understand intentionality. Our survey of experienced managers provides further evidence of
both the intentionality of, and motives for, certain linguistic choices.
2.2. Linguistic characteristics and managers’ association with the message
We next consider two specific language choices that are related to disclosure readability and may also be influenced by firm
performance and managers’ reporting goals – the use of first person pronouns and the use of active versus passive voice. Both of these
characteristics capture the extent to which management associates themselves or distances themselves from the information in the
disclosure.8 Prior work in psychology finds that individuals use fewer first person singular pronouns (e.g., “I”, “me”) when they feel
more psychologically distant from the target being described (Cohn et al., 2004).9 Similarly, work on pragmatics and discourse argues
that the avoidance of personal pronouns (Reilly et al., 2005), and first person pronouns in particular (Hyland, 2005), conveys less
involvement with a message. This suggests that managers may use fewer first person pronouns in their disclosures when news is bad
than when news is good, given that it may be an effective method to distance themselves from the poor performance being described
(Asay et al., 2018).
Likewise, the use of passive voice rather than active voice can also distance an individual from the information being conveyed
(Chafe and Danielewicz, 1987; Reilly et al., 2005). For example, consider the sentence, “the Company increased sales this quarter.” The
use of active voice in the sentence highlights the company's role in increasing sales. Alternatively, the sentence could be constructed
using the passive voice as, “the Company's sales increased this quarter.” In the sentence using passive voice, the agent (i.e., the
Company) is de-emphasized. Thus, the use of passive voice in disclosures can distance the firm from the actions or outcomes being
described. In addition, we expect the use of first person pronouns and passive voice to interact with self-enhancement motives, given
that managers with stronger self-enhancement motives should be even more interested in distancing themselves from poor perfor-
mance and associating themselves with good performance. Our second and third hypotheses are therefore:
H2a. Managers will prepare disclosures that include fewer first person pronouns when performance is bad than when performance is good.
H2b. The difference in the use of first person pronouns between disclosures of good and bad performance will be greater when managers have a
stronger self-enhancement motive.
H3a. Managers will prepare disclosures that include more passive voice when performance is bad than when performance is good.
H3b. The difference in the use of passive voice between disclosures of good and bad performance will be greater when managers have a
2.3. Causal explanations for performance and focus on the future
Finally, we consider two additional disclosure characteristics – the provision of causal explanations for performance and a focus
on the future – that may result in linguistic differences depending on firm performance and managers’ reporting goals.
2.3.1. Causal explanations

Prior literature argues that investors demand more explanation when performance is poor (Bloomfield, 2008; Bushee et al., 2018).
Further, managers appear to understand this demand and respond with more informative disclosures when performance is poor
(Merkley, 2014). Stronger self-enhancement motives should further increase the provision of causal explanations when performance
is poor. Precise causal explanations describe the contributors to poor performance and isolate them to a specific set of circumstances.
By highlighting causal explanations for poor performance, managers are better able to reassure investors that poor performance is not
ongoing and that future performance has the potential to improve.10 Our fourth hypothesis is therefore:
H4a. Managers will prepare disclosures that include more causal language when performance is bad than when performance is good.
H4b. The difference in the use of causal language between disclosures of good and bad performance will be greater when managers have a
8
In Section 3.4.5 we discuss how our measures of first person pronouns and passive voice relate to our broader measure of disclosure readability.
9
Although Cohn et al. (2004) specifically focus on the reduction in first person singular words (e.g., “I”, “me”, “mine”) as a distancing device, we also include first
person plural words (e.g., “we”, “us”, “our”) in our analyses, given that managers are speaking on behalf of a group of individuals when discussing firm performance. In
Section 4 where we discuss our results, our primary analyses are based on all first person pronouns, but we also separately consider the effects of firm performance and
reporting goals on the use of first person singular and first person plural pronouns.
10
Causal language not only has the potential to reassure investors, but has also been shown to change employee behavior and performance. In a controlled
experimental setting, Loftus and Tanlu (2018) show that the inclusion of causal language in performance feedback leads to improved performance in a subsequent task,
particularly when the initial feedback related to relatively poor performance.
383
2.3.2. Focus on the future

Prior archival work shows that firms use more future-oriented words in both their 10-K's (Li, 2008) and in conference calls
(Matsumoto et al., 2011) when firm performance is poor. Our study complements this prior work by holding constant everything
except the firm's economic performance, in order to rule out that results may be driven by other firm characteristics. In addition, we
expect the association between poor performance and increased use of future-oriented words to be stronger as self-enhancement
motives increase, as discussion of the future gives management the opportunity to highlight opportunities for improvement. Note that
our prediction could be driven by two effects that are not mutually exclusive. Managers may opportunistically shift discussion to the
future to downplay negative past performance or to provide useful information on how performance will be improved.11 Our final
hypothesis is that:
H5a. Managers will prepare disclosures that focus more on the future relative to the past when performance is bad than when performance is
good.
H5b. The difference in relative focus on the future versus the past between disclosures of good and bad performance will be greater when
managers have a stronger self-enhancement motive.
3. Primary experiment: method
3.1. Participants
Participants in our primary experiment are 205 experienced managers.12 On average, participants are 40.1 years old and have
16.9 years of work experience. 165 participants (80.5%) report being directly (114 participants) or indirectly (51 participants)
involved with preparing performance reports. 133 participants (65%) report being directly (73 participants) or indirectly (60 par-
ticipants) involved with making projections and/or providing explanations to analysts and investors. 130 participants (63.4%) report
being directly (62 participants) or indirectly (68 participants) involved in making choices that relate to the preparation of financial
statements. 173 participants (84.4%) are male.13
3.2. Design and manipulations
Participants are asked to assume that they are in charge of investor relations for the Dexico Corporation, a hypothetical firm. In
addition, they are asked to assume that, as part of their job duties, they often prepare press releases for investors on behalf of Dexico
and its different divisions. Participants are informed that they will prepare a report on behalf of the Beverages and Snacks division to
explain its performance to investors. The experiment uses a 2 × 2 between-subjects design, manipulating (1) performance (good
versus bad) and (2) reporting goal (unbiased versus favorable reporting). Varying the reporting goal allows us to provide participants
with either a relatively weak or strong self-enhancement motive (unbiased versus favorable reporting goal condition, respectively).
3.3. Task and procedure
After reading a brief introduction to the task, participants are told they will be given some basic facts. Participants are asked to
rely on their past experiences to make assumptions about the circumstances surrounding the facts and how they may have con-
tributed to the division's performance to provide a more coherent explanation to investors. To help participants understand how they
might use the facts to write their report, they are given an example before moving to the main task. Participants consider the
hypothetical fact that “The division moved its administrative offices into a new building this quarter.” They are told that if the
division performed well, they might describe the fact as “The move to a new office revitalized employees. They were more excited
about coming to work, the transition to the new facilities went smoothly, and most employees expressed that the new location made
their commute easier.'' In contrast, participants are told that if the division performed poorly, they might describe the fact as “The
move to a new office demoralized employees. They were less excited about coming to work, the transition to the new facilities did not
go smoothly, and most employees expressed that the new location made their commute harder.” The readability of these sample
reports is held as constant as possible for the good and bad performance examples.14 Importantly, these instructions are held constant
across conditions, so they are unlikely to explain any differences in between-condition results.
11
As with H1, we do not make ex ante predictions about the intentionality of managers’ choices for our remaining hypotheses, but we do ask participants directly
about their disclosure decisions in order to shed light on intentionality. Responses to these questions are discussed in our results section alongside the evidence on what
participants actually do in their reports.
12
We recruited participants in three ways. First, we directly emailed alumni of a top-rated MBA program (22 participants). Second, we posted announcements on
the LinkedIn alumni association pages (69 participants). Third, we asked current EMBA students to participate in our study (114 participants). Inferences are
unchanged if we control for the source of our participants.
13
While we do not directly ask participants whether they are native English speakers, we have two independent coders (who are blind to our conditions) read the
responses of our participants and rate whether they have concerns about any of the participants’ effectiveness at communicating in written English. Coders in-
dependently agree that they have concerns about two of the participants. Inferences are unchanged if we exclude these two participants, so we include them in all
analyses.
14
Using our measure of readability, which is discussed in more detail later in this section, the Good News example had a score of 15.01, and the Bad News example
had a score of 15.00, indicating that they were nearly identical in terms of readability.
384
Next, participants are presented with a paragraph containing our experimental manipulations. In the good (bad) news condition,
participants are told that the Beverages and Snacks division of Dexico delivered a 10% increase (decrease) in sales this quarter
compared to the same quarter last year. They are also told that this performance is better (worse) than all other divisions within the
company, and better (worse) than most other firms in the same industry. In the unbiased reporting goal condition, participants are
told that they should report the division's performance accurately, and “in a manner that is as unbiased as possible”. In the favorable
reporting goal condition, participants are told that they should report the division's performance accurately, but “in a manner that
presents the performance in as favorable a light as possible”.
Next, participants proceed to a page containing four facts available for use in their report.15 Participants are instructed that the
facts are presented in no particular order and that they can use one or more facts in their report to support their description of why
the division performed as it did. Below the four facts is a box in which participants can type their report (see Fig. 1). They are told that
they must remain on the page for at least three minutes in order to give them time to draft the report. After three minutes have
passed, a button pops up allowing them to move forward in the study whenever they are ready. This technique allows participants to
provide responses that are (1) long enough for our analyses and (2) varied enough to detect real differences in language choices.
Finally, participants answer follow-up questions about their report, manipulation check questions, and demographic questions.
Our goal in designing this task was to provide a rich enough performance setting to allow the experienced managers to craft
relatively detailed performance reports while also drawing on their prior experience as managers. For example, this setting allows
participants to draw upon the tradeoffs and motives they face when reporting on firm performance. If we had instead used a real
performance task with constructed incentives, we would have limited our ability to gain insight from participants’ knowledge of the
reporting environment in practice while also potentially confounding performance with individual characteristics of participants
(e.g., participants who performed well might be more hardworking or intelligent, making it difficult to determine whether differences
in participants’ reports are due to performance or participant characteristics).16 This task allows us to achieve these objectives and
directly capture the language choices of experienced managers without being modified by the various parties that craft and create
press releases in the real world (e.g., legal departments).
One potential limitation of our task is that participants do not actually observe the true cause of performance and instead
construct a story for performance based on the facts we provide. While we acknowledge this as a potential limitation, there are at
least three important reasons to believe it does not affect the validity of our results. First, in constructing causal narratives, in-
dividuals generally draw on the most accessible potential factors available in memory – not necessarily the true causal drivers of an
outcome (Tversky and Kahneman, 1973). Similarly, in our setting, the four facts provide accessible factors that are plausible con-
tributors to realized performance and individuals are asked to draw upon these accessible potential factors and upon their prior
experiences to construct a causal narrative. Second, even if our task relies on a slightly different cognitive mechanism than creating a
causal narrative by drawing on memory, this could change the levels of the linguistic characteristics we measure, but is less likely to
change the directional effects of our performance and reporting goal manipulations. Finally, many of our findings align with empirical
patterns documented in the literature, providing at least some level of validation for this measurement technique.
3.4. Dependent measures
Our dependent variables are selected to match those used in prior archival empirical and experimental studies to increase the
comparability of our results.
3.4.1. Readability measure

There is considerable disagreement in the literature over how best to measure “readability.” Many of the standard readability
measures were developed for leveling grade-school textbooks and consist of simple formulas based on sentence length and the
average number of syllables in words (Dubay, 2004). Two such measures that have been widely used in the prior accounting lit-
erature are the Fog Index and the Flesch Reading Ease Score (Flesch Score).17 While the Fog Index and Flesch Score measures are easy
to calculate and their use is widespread, some have argued that they are too simple to provide a meaningful measure of readability
(Dubay, 2004), particularly in business communications (Jones and Shoemaker, 1994; Miller, 2010; Loughran and McDonald,
2014a,b).18 Specifically, the Fog and Flesch measures do not do a good job of capturing the complexity of sentence structure. For
instance, “the cat sat on the mat” would be judged to have the same readability as a phrase including the exact same words but
rearranged (e.g., “mat sat the on the cat”), even though the latter is clearly less readable. More recently, some studies have used either
file size (Loughran and McDonald, 2014a) or the Bog Index (Bonsall et al., 2017) to capture readability of disclosures in archival
samples. While a file size proxy allows for calculation of readability in large-sample archival studies, it is likely to be much noisier
15
To choose the four facts to be included, we started by presenting a larger list of facts to 60 individuals recruited from Amazon Mechanical Turk. For each fact
presented, these individuals were asked to rate on a 101-point scale whether the fact was “unambiguously negative” (0) or “unambiguously positive” (100). For the
current study, we retained the four facts that did not significantly differ from the midpoint of 50 on the scale (Kida, 1984; Libby and Trotman, 1993). This design
ensures that participants could plausibly use any of the four facts (held constant across all conditions) to explain either good or bad performance in the division.
16
For example, prior accounting studies have asked participants to create rebus puzzles (Kachelmeier et al., 2008; Kachelmeier and Williamson, 2010), complete a
sandwich-making task (Farrell et al., 2008), or complete a trivia task (Libby and Rennekamp, 2012; Asay, 2018).
17
See e.g., Li (2008), Biddle et al. (2009), Miller (2010), Lehavy et al. (2011), Lawrence (2013) and Bushee et al. (2018).
18
For example, multi-syllabic words such as “telecommunication” or “depreciation” would indicate lower levels of readability according to the Fog Index and
Flesch Score, although these words are unlikely to be difficult to read for most investors.
385
Fig. 1. Screen shot showing the four ambiguous facts provided to participants for the preparation of their report.
This figure depicts a screen shot from our experiment, in which 205 experienced managers assume the role of director of investor relations and explain the perfor-
mance of a division in a hypothetical firm. Participants are randomly assigned to one of four cells in a 2 × 2 manipulation of whether (1) the division had good or bad
performance for the quarter and (2) the reporting goal is either to be unbiased or to elicit as favorable a reaction as possible. In all conditions, participants receive the
same four facts to use in drafting their report (as shown above). These four facts were pretested with a different group of participants and were selected because they
were not considered to be unambiguously positive or negative. This design choice was meant to ensure that participants in the study could plausibly use any of the four
facts to explain either good or bad performance in the division.
than a measure based on the actual language used in a disclosure (Bonsall et al., 2017). The Bog Index also allows for calculation of
readability in large-sample archival studies, but the proprietary Stylewriter software that is used to collect the measure provides less
transparency with respect to the actual components that contribute to readability.
In our study, we use a measure of readability that is more complex to calculate than some alternative measures used in prior
studies, but is more transparent and more precisely captures actual levels of readability. We develop a measure of readability that
includes most of the features of readability that are manipulated in Rennekamp (2012) and measured in Miller (2010). Thus, our
Readability measure is largely based on the features the SEC suggests will improve the readability of firm disclosures (SEC, 1998). Our
measure of readability is similar to Miller's (2010) measure and is calculated as instances of [(Passive Voice + Hidden
Verbs + Superfluous words + Negations + Complex Synonyms – Personal Pronouns)*10]/[number of words/average words per sen-
tence].19 Finally, we rescale the Readability measure such that higher scores indicate higher readability.20
3.4.2. Association with the message measures

Our first measure of association with the message is the use of first person pronouns. Our measure of participants’ use of first
person pronouns is calculated by capturing the I and we variables from the LIWC2015 software. The I variable captures first person
singular words (e.g., “I”, “me”) and the we variable captures first person plural words (e.g., “we”, “our”). We sum these variables to
get a total measure of the use of first person pronouns. Our second measure of association with the message relates to the use of
passive voice. Our measure of participants’ use of passive voice is calculated by analyzing each report using Stylewriter software.
19
The number of Negations and Personal Pronouns are calculated using LIWC2015 software rather than Stylewriter, because Stylewriter does not separately report
these two linguistic style features.
20
To rescale the Readability measure we subtract the raw score (where higher measures indicate lower readability) from 20. The rescaling procedure and values
were chosen so that most participants’ reports had positive readability scores and so that higher scores indicated greater readability to make results more interpretable.
386
Stylewriter summarizes various linguistic characteristics from written texts. For our analyses, we use the output measure counting the
number of instances of passive voice in a text.
3.4.3. Causal explanation measure

Our measure of participants’ use of causal explanation words is calculated by capturing the cause variable from the LIWC2015
software, which includes component words related to providing causal explanations (e.g., “because”, “effect”).
3.4.4. Focus on the future measure

Our measure of participants’ relative focus on the future is calculated by using the focusfuture and focuspast variables from the
LIWC2015 software to capture the number of words that focus on the future (e.g., “will”, “soon”) and past (e.g., “did”, “talked”). We
then construct the measure used in our analyses by dividing the number of future words by the sum of future and past words.
3.4.5. Relation between readability and other measures

First person pronouns and passive voice are both components of readability, but they also relate to the distinct construct of
association with the message. For example, our measure of readability includes personal pronouns (first and third person), whereas
our measure of association with the message relates only to first person pronouns. While the third person pronouns captured in our
readability measure can improve the understandability of text by more clearly indicating the target objects in a conversation (e.g.,
“You will receive a $1.00 dividend” vs. “Shareholders will receive a $1.00 dividend”), they do not capture differences in the speaker's
association with a message. Similarly, passive voice is only one component of our readability measure, such that there is uncertainty,
ex ante, whether passive voice will exhibit a similar pattern of results as readability overall. Most notably, managers’ reporting goal
and performance may influence their propensity to associate themselves with the message, even in the absence of intentional ob-
fuscation of poor performance. The extent to which the reports focus on the future and provide causal explanations for performance
are not directly related to readability. Rather, these two linguistic characteristics reflect alternative approaches managers might use
to communicate poor performance.21
4. Primary experiment: results
4.1. Manipulation checks
For our manipulation check questions, 90.7% of participants correctly report whether the division's performance was good or bad
in the recent quarter, while 85.4% of participants correctly report whether their primary reporting goal in writing the report was to
be as unbiased as possible or to present the division in as favorable a light as possible.22 We also ask participants to rate the extent to
which another person reading their report would judge the division favorably or unfavorably (1 = “very unfavorably”, 10 = “very
favorably”). Consistent with a successful performance manipulation, participants believe that the division would be viewed more
favorably when news is good (mean = 6.81) than when news is bad (mean = 6.26), and the difference is significant (p = 0.018, one-
tailed). Consistent with a successful reporting goal manipulation, participants believe that the division would be viewed more fa-
vorably when there is a favorable reporting goal in place (mean = 6.92) than when the reporting goal is to be unbiased
(mean = 6.15) and the difference is significant (p = 0.002, one-tailed).
4.2. Tests of readability hypotheses
H1a predicts that participants will prepare reports that are less readable when performance is bad than when performance is
good, and H1b predicts that this will be particularly true when managers have a stronger self-enhancement motive. Panel B of Table 1
shows that, consistent with H1a, participants prepare reports that are less readable when news is bad than when news is good
(p = 0.058, one-tailed) and, consistent with H1b, this is particularly true when they have a stronger self-enhancement motive
(p = 0.015, one-tailed). Panel A of Fig. 2 presents these results graphically.
While our results support that bad news disclosures are less readable, particularly when self-enhancement motives are stronger,
this does not appear to be driven by participants intentionally making bad news disclosures less readable. Instead, in this primary
experiment, the interaction appears to be driven by participants making good news disclosures more readable when they have a
stronger self-enhancement motive. The simple main effect of reporting goal is not significant when news is bad (p = 0.596, two-
tailed, untabulated). When news is good, however, participants prepare significantly more readable reports when they have a
21
By construction, readability is highly correlated with the use of passive voice (ρ = −0.345; p < 0.001, two-tailed, untabulated) and the use of first person
pronouns (ρ = 0.697; p < 0.001, two-tailed, untabulated). Readability is also correlated with the use of future tense words (ρ = 0.221; p = 0.002, two-tailed,
untabulated) but not with the use of causal words (ρ = 0.107; p = 0.128, two-tailed, untabulated). In addition, untabulated results indicate that personal pronoun
usage is associated with both causal words (ρ = 0.697, p < 0.001, two-tailed) and with future tense words (ρ = 0.252, p <0.001, two-tailed). The use of passive voice
is negatively correlated with future tense words (ρ = −0.143; p = 0.042), but is only marginally significantly correlated with causal words (ρ = 0.120, p = 0.088,
two-tailed) and not significantly correlated with personal pronoun usage (ρ = −0.077, p = 0.273, two-tailed). A regression analysis including each of these four
linguistic characteristics (as well as our manipulated variables) indicates that readability is increasing in pronoun usage (t = 12.97; p < 0.001, two-tailed) and
decreasing in the use of passive voice (t = −2.66; p < 0.001, two-tailed), but is unrelated to the use of causal words (t = −0.175; p = 0.490, two-tailed) or future
tense words (t = 0.947; p = 0.690, two-tailed).
22
Inferences are unchanged if we exclude participants who answered manipulation check questions incorrectly.
387
Table 1
Primary experiment descriptive statistics and analysis of variance – readability measure.
Performance Reporting goal Overall
Unbiased Favorable
Panel A. Descriptive statistics - mean and (standard deviation), by condition

Good 10.74 16.52 13.47
(10.09) (11.92) (11.31)
n = 56 n = 50 n = 106
Bad 11.71 10.48 11.10

(11.64) (12.26) (11.91)
n = 50 n = 49 n = 99
Overall 11.20 13.53 12.32

(10.81) (12.40) (11.64)
n = 106 n = 99 n = 205
Panel B. Results of analysis of variance (ANOVA) – Test of H1
Source S.S. d.f. M.S. F-statistic p-value
Performance 328.45 1 328.45 2.50 0.058a

Reporting goal 264.55 1 264.55 2.01 0.158
Performance × Goal 625.40 1 625.40 4.76 0.015a
Table 1, Panel A presents descriptive statistics on the Readability measure in our experiment, in which 205 experienced managers draft a report explaining the
performance of a division in a hypothetical firm. Panel B presents ANOVA results investigating whether firm performance (good vs. bad) and reporting goal (unbiased
vs. favorable) affect the readability of the report.
a
One-tailed equivalent, given directional predictions.
favorable reporting goal than a goal to be as unbiased as possible (p = 0.010, two-tailed, untabulated).
Participants’ responses to debriefing questions provide additional insight into the intentionality of disclosure readability deci-
sions. Panel A of Table 2 shows mean responses, by condition, to two questions participants answered about the readability of their
reports. The first question asks participants “How easy or difficult would you say it is to read your report?” (1 = “very easy”,
10 = “very difficult”). The second question asks participants about the extent to which they were motivated to make their report
easier or more difficult to understand (1 = “I was motivated to make my report easier to understand”, 10 = “I was motivated to make
my report more difficult to understand”). Panel B of Table 2 shows that we find no significant main effects or an interaction on either
of these two measures. These results should be interpreted with caution for at least two reasons. First, the lack of a significant effect is
not affirmative evidence that the effect is not there. Second, participants may be reluctant to admit to intentionally making dis-
closures less readable. Nevertheless, in combination with the results shown in Table 1, our results generally support the idea that
participants at least do not appear to be intentionally making bad news disclosures less readable to obfuscate poor performance,
contrary to arguments made in prior literature.
4.3. Tests of hypotheses related to managers’ association with the message
H2 and H3 make predictions about linguistic characteristics that can be used to associate or distance oneself from the information
in a disclosure. H2a predicts that participants will use fewer first person pronouns (e.g., “I”, “We”, etc.) when performance is bad than
when performance is good, and H2b predicts that this difference will be greater when participants have a stronger self-enhancement
motive.23 Panel B of Table 3 shows that neither H2a nor H2b is supported (both p-values > 0.220, one-tailed). Panel B of Fig. 2
presents these results graphically. However, participants do use more first person pronouns when they have a stronger self-en-
hancement motive (p = 0.054, two-tailed). This finding suggests that managers are more willing to associate themselves with the
information in the report when they have written the report to present the firm more favorably.24 Panel A of Table 4 shows mean
responses, by condition, to our open-ended debriefing question asking participants to estimate the number of first person pronouns
used in their reports. Panel B of Table 4 shows that participants do not believe that they used fewer first person pronouns when news
was bad than when news was good (p = 0.448, two-tailed). They also do not indicate any difference in first person pronouns when
there is a stronger self-enhancement motive (p = 0.732, two-tailed).
Because prior work distinguishes between first person singular (e.g., “I”, “me”) and first person plural (e.g., “we”, “our”)
23
The first person pronouns counted in the two categories include the following: I, I'd, I'll, I'm, I've, id, ive, me, mine, my, myself, let's, lets, our, ours, ourselves, us,
we, we'd, we'll, we're, we've, and weve.
24
Consistent with this idea, untabulated results indicate that pronoun usage is positively associated with disclosure tone (ρ = 0.152; p = 0.030, two-tailed) and
with positive emotion words (ρ = 0.189; p = 0.007, two-tailed).
388
389
Fig. 2. Primary experiment results by condition for linguistic measures used to test our hypotheses. Results by condition for linguistic measures used to test our
hypotheses, continued.
This figure presents results graphically for our five dependent variables of interest. In our experiment, 205 experienced managers assume the role of director of investor
relations and explain the performance of a division in a hypothetical firm. Participants are randomly assigned to one of four cells in a 2 × 2 manipulation of whether
(1) the division had good or bad performance for the quarter and (2) the reporting goal is either to be unbiased or to elicit as favorable a reaction as possible. In all
conditions, participants draft an open-ended report, drawing on their prior experience. We then use textual analysis to analyze these reports for the linguistic
characteristics of interest. Panel A presents readability scores from these reports, by condition. Panel B presents the extent to which the language in the reports focuses
on the future vs. the past, by condition. Panel C presents the extent to which the reports include causal language, by condition. Panel D presents the extent to which the
reports use more personal pronouns, by condition. Panel E presents the extent to which the reports use passive rather than active voice, by condition.
Table 2
Primary experiment descriptive statistics and analysis of variance – participant responses to questions about the readability of their reports.
Condition
Measure (and scale endpoints) Good performance and Good performance and Bad performance and Bad performance and
unbiased reporting goal favorable reporting goal unbiased reporting goal favorable reporting goal
Panel A. Descriptive Statistics – mean and (standard deviation), by condition

How easy or difficult would you say it is to 3.43 3.22 3.04 3.39
read your report? (1.92) (1.92) (1.78) (1.62)
• 1: “Very Easy” n = 56 n = 50 n = 50 n = 49
• 10: “Very Difficult”
To what extent were you motivated to
make your report easier or more
difficult for investors to understand?
3.41 3.50 3.50 3.73
• 1: “I was motivated to make my report (1.94) (2.01) (2.05) (2.14)
easier to understand” n = 56 n = 50 n = 50 n = 49
• 10: “I was motivated to make my report
more difficult to understand”
Panel B. Results of analysis of variance (ANOVA)

Measure: Easy vs. difficult to read your report
Performance 0.62 1 0.62 0.19 0.665

Goal 0.24 1 0.24 0.07 0.785
Performance × Goal 3.95 1 3.95 1.19 0.276
Measure: Motivated to make your report easier or more difficult to understand
Performance 1.34 1 1.34 0.32 0.570

Goal 1.34 1 1.34 0.32 0.570
Table 2, Panel A presents descriptive statistics for follow-up questions in our experiment related to disclosure readability, in which 205 experienced managers draft a
report explaining the performance of a division in a hypothetical firm. Panel B presents ANOVA results investigating whether firm performance (good vs. bad) and
reporting goal (unbiased vs. favorable) affect participants’ responses to these follow-up questions about their report.
pronouns, we also separately look at the effects of performance and reporting goals on these two categories of pronouns. When
analyzed separately, we find that participants use fewer first person singular pronouns when news is bad (p = 0.039, one-tailed,
untabulated), but do not use fewer first person plural pronouns (p = 0.369, one-tailed- untabulated). This provides some support for
H2a. Participants appear to use fewer first person singular pronouns like “I”, or “me” when performance is poor, consistent with
distancing themselves from the information. When analyzed separately, we still do not observe an interaction between performance
and reporting goal on the use of either first person singular pronouns (p = 0.255, one-tailed, untabulated) or first person plural
pronouns (p = 0.288, one-tailed, untabulated).
H3a predicts that participants will use more passive voice in their reports when performance is bad than when performance is
good, and H3b predicts that the difference will be greater when they have a stronger self-enhancement motive. Consistent with H3a,
Panel B of Table 3 shows that participants use more passive voice when performance is bad than when performance is good
(p = 0.057, one-tailed). Consistent with H3b, the difference in use of passive voice between good and bad news is greater when
participants have a stronger self-enhancement motive (p < 0.001, one-tailed). Panel C of Fig. 2 presents these results graphically.
Panel A of Table 4 shows mean responses, by condition, to our debriefing question asking participants the extent to which their report
used active or passive voice in their report (1 = “My report primarily used active voice”, 10 = “My report primarily used passive
390
Table 3
Primary experiment descriptive statistics and analysis of variance – other linguistic characteristics.
Condition
Measure Good performance and Good performance and Bad performance and Bad performance and
unbiased reporting goal favorable reporting goal unbiased reporting goal favorable reporting goal
Panel A. Descriptive statistics – mean and (standard deviation), by conditiona

Personal pronouns 2.48 3.62 2.46 2.98
(2.59) (3.50) (3.02) (3.12)
n = 56 n = 50 n = 50 n = 49
Passive voice 1.48 1.06 1.18 1.88

(1.10) (0.93) (1.06) (1.49)
n = 56 n = 50 n = 50 n = 49
Causal explanation 4.09 4.38 4.90 5.33

words (2.63) (2.52) (3.62) (3.60)
n = 56 n = 50 n = 50 n = 49
Focus on the future 0.20 0.22 0.38 0.32

(0.28) (0.23) (0.224) (0.23)
n = 55a n = 50 n = 49a n = 49

Measure: Personal pronouns (Test of H2)
Performance 5.62 1 5.62 0.60 0.220b

Goal 35.08 1 35.08 3.75 0.054
Performance × Goal 4.89 1 4.89 0.52 0.235b
Measure: Passive voice (Test of H3)

Performance 3.39 1 3.39 2.51 < 0.057b

Goal 0.97 1 0.97 0.72 0.398
Performance × Goal 16.02 1 16.02 11.86 < 0.001b
Measure: Causal explanation words (Test of H4)

Performance 39.48 1 39.48 7.60 0.003b

Goal 6.58 1 6.58 1.27 0.262
Measure: Focus on the future (Test of H5)

Performance 1.02 1 1.02 16.90 < 0.001b

Goal 0.01 1 0.01 0.23 0.629
Table 3, Panel A presents descriptive statistics for other linguistic characteristics used by participants preparing reports in our experiment, in which 205 experienced
managers draft a report explaining the performance of a division in a hypothetical firm. Panel B presents ANOVA results investigating whether firm performance (good
vs. bad) and reporting goal (unbiased vs. favorable) affect the use of personal pronouns, passive voice, causal words, and future-tense words.
a
Two observations were removed from these analyses because they had zero values in the denominator for the calculation of the measure (future words count/(past
words count + future words count)).
b
One-tailed equivalent, given directional predictions.
voice”). Panel B of Table 4 shows that, despite our finding support for H3a and H3b, participants do not report that they use more
passive voice when news is bad (p = 0.882, two-tailed), or that there is a stronger difference in the use of passive voice between good
and bad news when they have a stronger self-enhancement motive (p = 0.361). Pennebaker (2011) suggests that linguistic style
choices (such as the use of active versus passive voice) are particularly likely to occur beneath awareness as compared to content
choices (such as discussions of the future or causal explanations), which may help to explain why participants appear unable to
accurately report differences in their use of passive voice across our performance and reporting goal conditions.
391
Table 4
Primary experiment descriptive statistics and analysis of variance – participant responses to questions about other linguistic characteristics of their reports.
Condition
Measure (and scale endpoints) Good performance and Good performance and Bad performance and Bad performance and
unbiased reporting favorable reporting unbiased reporting favorable reporting
goal goal goal goal
Panel A. Descriptive statistics – mean and (standard deviation), by condition

Please provide your best estimate (in whole 3.71 4.90 3.42 4.12
numbers) of the number of first person pronouns (4.65) (6.52) (4.05) (4.64)
(e.g., “I”, “We”, “Our”) contained in your report. n = 56 n = 50 n = 50 n = 49
To what extent did you use active or passive voice in 5.34 5.00 5.06 5.39
your report? (2.65) (2.52) (2.60) (2.64)
• 1: “My report primarily used active voice” n = 56 n = 50 n = 50 n = 49
• 10: “My report primarily used passive voice”
To what extent did your report focus on reporting 5.55 5.96 5.90 7.31
“just the facts” of the division's performance vs. (2.62) (2.33) (2.43) (1.72)
explaining the underlying causes for the n = 56 n = 50 n = 50 n = 49
division's performance?
• 1: “I was primarily focused on reporting “just
the facts”
• 10: “I was primarily focused on explaining the
underlying causes for performance”
To what extent did your report focus on past 4.34 3.72 5.44 6.18
performance of the division vs. expectations for (2.71) (2.32) (2.62) (2.05)
future performance? n = 56 n = 50 n = 50 n = 49
• 1: “My report focused primarily on past
performance”
• 10: “My report focused primarily on future
performance expectations”

Measure: Use of personal pronouns in the report
Performance 14.68 1 14.68 0.58 0.448

Goal 45.55 1 45.55 1.79 0.182
Measure: Active vs. passive voice

Performance 0.15 1 0.15 0.02 0.882

Goal 0.00 1 0.00 0.00 0.987
Measure: Just the facts vs. explaining underlying causes

Performance 36.60 1 36.60 6.85 0.010

Goal 41.98 1 41.98 7.85 0.006
Measure: Focus on past performance vs. expectations for future performance

Performance 162.33 1 162.33 27.05 < 0.001

Goal 0.20 1 0.20 0.03 0.856
Panel A presents descriptive statistics for several follow-up questions in our experiment related to participants’ perceptions of the linguistic choices they made in their
reports. In our experiment, 205 experienced managers draft a report explaining the performance of a division in a hypothetical firm. Panel B presents ANOVA results
investigating whether firm performance (good vs. bad) and reporting goal (unbiased vs. favorable) affect participants’ responses to these follow-up questions about
their report.
392
4.4. Tests of hypotheses related to causal explanations for performance and focus on the future
H4a predicts that participants will prepare reports that include more causal explanation words when performance is bad than
when performance is good and H4b predicts that this will be particularly true when they have a stronger self-enhancement motive.
Consistent with H4a, Panel B of Table 3 shows that participants use more causal words when performance is bad than when per-
formance is good (p = 0.003, one-tailed). However, H4b is not supported, as we do not find that this effect is stronger when par-
ticipants have a stronger self-enhancement motive (p = 0.416, one-tailed). Panel D of Fig. 2 presents these results graphically.
Panel A of Table 4 shows mean responses, by condition, to our debriefing question asking participants the extent to which their
report focused on explaining underlying causes for the firm's performance (1 = “I was primarily focused on reporting ‘just the facts’”,
10 = “I was primarily focused on explaining the underlying causes for performance”). Panel B of Table 4 shows that, consistent with
H4a, participants believe that their report focuses on providing more causal explanation for underlying performance when news is
bad than when news is good (p = 0.010, two-tailed). They also report that they provide more causal explanation when they have a
stronger self-enhancement motive (i.e., a favorable reporting goal), (p = 0.006, two-tailed).25
H5a predicts that participants will prepare reports that focus more on the future relative to the past when performance is bad than
when performance is good, and H5b predicts that this will be particularly true when they have a stronger self-enhancement motive.
Consistent with H5a, Panel B of Table 3 shows that, when performance is bad, participants use more words that focus on the future in
their reports, relative to words that focus on the past (p < 0.001, one-tailed). However, H5b is not supported, as we do not find that
this effect is stronger when participants have a stronger self-enhancement motive (p = 0.894, one-tailed). Panel E of Fig. 2 presents
these results graphically.
Despite the fact that we do not find support for H5b when looking at the reports that participants actually prepare, our debriefing
question related to the focus on future versus past performance suggests that participants believe they behave in the predicted way.
Panel A of Table 4 shows responses, by condition, to our debriefing question asking participants to rate the extent to which their
report focused on past performance versus future expectations (1 = “My report focused primarily on past performance”, 10 = “My
report focused primarily on future performance expectations.” Panel B shows that, consistent with what we predict in H5a, parti-
cipants believe that their report focuses more on future expectations than past performance when news is bad than when news is good
(p < 0.001, two-tailed).26 Further, and consistent with what we predict in H5b, this difference is even greater when participants have
a stronger self-enhancement motive (p = 0.048, two-tailed).
The difference between what participants do (as tested in H5b and shown in Table 3) and what they say they do (as shown in
Table 4’s supplemental analyses) could be driven by participants’ inability to accurately infer their linguistic choices
(Pennebaker, 2011) and/or by noise in our measure for testing participants’ relative focus on the future in their reports. The pre-
determined words in the LIWC2015 categories were not developed specifically for the purpose of analyzing business texts. As a result,
our measures may be (1) including words that should not be counted or (2) omitting words that should be counted in a business
context (Matsumoto et al., 2011; Dikolli et al., 2015).
5. Supplemental experiment
In our primary experiment, we operationalized our reporting goal manipulation by instructing participants to report performance
either “in a manner that is as unbiased as possible” or “in a manner that presents the performance in as favorable a light as possible.”
Given that poor performance is unfavorable by definition, it is possible that participants in the bad news condition were unclear as to
how to present unfavorable news in a favorable light. Instead, the instructions may have prompted participants to think of ways to
provide a justifiable explanation (as predicted by H4) and describe a more favorable future (as predicted by H5), but not to think of
ways to make bad news less readable. The instructions may have also led participants to consider ways to maximize the favorable
tone of the disclosure rather than to minimize the unfavorable tone. If so, using a less positive tone in the high self-enhancement
motives instructions might affect the extent to which the participants use causal language in describing their performance and focus
on the future. Further, a less positive tone in these instructions might lead participants to more naturally resort to intentionally
issuing a less readable report to obfuscate poor performance.
To test these possibilities, we conduct a supplemental experiment using a 1 × 2 between-subjects design in which all participants
receive the bad news information and we manipulate the instructions used to induce a stronger self-enhancement motive. 74 ex-
perienced managers enrolled in a highly-rated EMBA program participated. The participants are instructed to present their perfor-
mance “in a manner that presents the performance in as favorable a light as possible” (the “most favorable condition”, which uses the
same wording as in our primary experiment) or “in a manner that presents the performance in the least unfavorable light as possible”
(the “least unfavorable condition”). All other procedures are identical to our primary experiment.
As shown in Table 5 Panel A, we find no difference across conditions in participants’ use of personal pronouns (p = 0.461, two-
25
While we do not find a significant interaction between performance and reporting goal (p = 0.124, two-tailed), the simple main effect of performance is not
significant when the reporting goal is to be unbiased (p = 0.442, two-tailed), but is significant when participants have a favorable reporting goal (p = 0.004, two-
tailed), providing at least some support for the idea that participants’ beliefs about the provision of causal explanations in their reports is consistent with what we
predict in H3b about their actual behavior.
26
All supplemental analyses of participants’ beliefs about their linguistic choices are reported as two-tailed rather than one-tailed tests. Given that prior work in
linguistics provides mixed evidence as to whether individuals are aware of their linguistic choices (Pennebaker, 2011), we do not make directional predictions ex ante
as to whether participants will be able to accurately infer the linguistic characteristics of their reports.
393
Table 5
Supplemental experiment comparisons in linguistic characteristics of disclosures prepared by managers between the most favorable and least unfavorable instructions
conditions.
Measure “Most Favorable” condition “Least Unfavorable” condition p-value
Panel A. Supplemental experiment results using measures from our main experiment
Readability (H1) 18.72 14.64 0.091
First person personal pronouns (H2) 4.07 3.48 0.461
Passive voice (H3) 1.29 1.06 0.400
Causal explanations (H4) 4.24 5.05 0.194
Future focus (H5) 0.37 0.36 0.812
Panel B. Supplemental experiment results for individual component measures of readability

Hidden verbs 0.32 0.47 0.325
Passive Voice 1.29 1.06 0.400
Superfluous words 0.87 0.94 0.761
Negations 0.16 0.72 0.002
Complex synonyms 2.45 2.81 0.278
First and third person personal pronouns 4.89 4.31 0.493
Number of words 86.05 85.03 0.878
Average words/ sentence 21.55 22.02 0.709
Table 5 presents results of our supplemental 1 × 2 experiment, in which 74 experienced participants are provided with four facts and are asked to draft a report
explain the poor performance of a hypothetical firm. Participants are randomly assigned to either receive instructions to present the firm in as favorable a light as
possible (“most favorable” condition) or the least unfavorable light as possible (“least unfavorable” condition). Panel A summarizes results, by condition, for the five
measures used in our main experiment to test our hypotheses. Panel B summarizes results, by condition, for the components that make up our readability measure. All
p-values are two-tailed given our lack of directional predictions. Higher numbers indicate a disclosure is more readable, or includes more words related to the future
relative to the past, more causal explanation words, more personal pronouns, and more passive voice.
tailed), passive voice (p = 0.400, two-tailed), causal words (p = 194, two-tailed), or words that focus on the future relative to words
that focus on the past (p = 0.812, two-tailed). These findings suggest that the tests of H2, H3, H4, and H5 are robust to using a less
positive tone in the self-enhancement instructions. Interestingly, we do find that participants in the least unfavorable condition write
marginally less readable reports than participants in the favorable condition (p = 0.091, two-tailed).27 This result does not, however,
appear to be driven by an attempt to obfuscate poor performance. Specifically, participants in the least unfavorable condition report
being less motivated to make their reports difficult to understand (p = 0.060, two-tailed) and believe another person would judge the
division less favorably after reading their report (p = 0.091, two-tailed). Additional analyses (see Panel B) indicate that the difference
in readability arises because participants in the least unfavorable condition use more negations (p = 0.002, two-tailed). Further, our
manipulation is no longer a significant predictor of readability after controlling for participants’ use of negations (p = 0.237, two-
tailed, untabulated). Combined, these results provide additional support for the inferences drawn from our primary experiment
related to managers’ linguistic choices, with one exception. The exception is that, although unaware that they are doing so, managers
appear to provide less readable disclosures under “least unfavorable” reporting goals when performance is poor, primarily through
the increased use of negations.
6. Survey of experienced managers
Our primary experiment provides evidence on how firm performance and reporting goals affect linguistic choices in disclosures,
and responses to post-experimental questions provide evidence on the intentionality of these choices. The purpose of our survey is to
provide complementary evidence on the possible motives behind these choices. Participants in our survey are 144 experienced
managers enrolled in a highly-rated EMBA program.28 In the survey, the participants rate possible explanations for three of the
differences noted in our main experiment and choose between two reports to issue to describe some poor performance in their firm.
6.1. Method
To begin, participants are provided with background information about our experiment. This background information explains
27
These results are subject to at least one caveat, in that we identify an influential outlier observation in the “least unfavorable” condition (with a mean readability
score of −15, which is greater than 3 standard deviations below the overall mean readability score of 16.74). When this participant is excluded, the mean Readability
for the “least unfavorable” condition goes from 14.64 to 15.49, and the significance of the difference between the mean readability score in the “most favorable” and
“least unfavorable” conditions goes from 0.091 to 0.158. However, the difference in the use of negations still remains significant.
28
On average, participants are 37.6 years old and have 15.1 years of work experience. 113 participants (78.5%) report being directly (64 participants) or indirectly
(49 participants) involved with preparing performance reports. 89 participants (61.8%) report being directly (37 participants) or indirectly (52 participants) involved
with making projections and/or providing explanations to analysts and investors. 73 participants (51.0%) report being directly (22 participants) or indirectly (51
participants) involved in making choices that relate to the preparation of financial statements (one participant did not indicate his/her involvement). 115 participants
(81.0%) are male (two participants did not indicate their gender).
394
(1) that the experienced managers in our experiment were asked to read information about a hypothetical firm, (2) that half of the
experienced managers were told that recent performance was relatively good while the other half were told that recent performance
was relatively poor, (3) that the experienced managers were each provided with the same four facts that may have contributed to
performance, and (4) that the experienced managers were asked to prepare a performance report by making assumptions about those
facts and drawing on their prior business experiences in order to create a more coherent story for investors. In addition, survey
participants are informed that the experienced managers were provided with a reporting goal to portray the firm in “as favorable a
light as possible.” We focus on the favorable reporting goal condition because managers generally have strong motives to present the
firm favorably.
Survey participants are then presented with a summary of three of the differences observed (readability, causal words, and focus
on the future) between the reports of participants in the good performance/favorable reporting goal condition and participants in the
bad performance/favorable reporting goal condition. We focus on these three characteristics because responses in our primary
experiment suggest that they are more likely to be driven by intentional choices than either passive voice or the use of personal
pronouns. For each difference presented, survey participants are then asked to rate on 101-point scales (endpoints: 0 = “very un-
likely” to 100 = “very likely”), based on their own past experience, the extent to which several factors may have contributed to the
characteristics of the performance reports. Finally, participants are asked to assume that they are a manager who has to describe some
poor performance in their firm, are presented with a more and less readable disclosure that otherwise contains the same performance
information, and indicate which of the two disclosures they would choose to provide.
6.2. Results
6.2.1. Readability
Survey participants are informed that the reports were less readable when describing poor performance than when describing
good performance.29 They then rate five potential explanations for this finding. The order in which the five potential explanations
were presented was randomized for each survey participant. The five explanations and results are summarized in Table 6 Panel A.30
Directionally, survey participants agreed most strongly with the explanation that managers intentionally write more readable reports
when performance is good, with the specific intention of highlighting positive performance. This is the only explanation where the
95% confidence interval for the mean did not overlap with the 95% confidence interval of the other explanations (not tabulated).
Further, pairwise comparisons reveal that participants rated this explanation significantly higher than any other explanation (all
p < 0.001, two-tailed), and none of the other explanations differed from one another (all p > 0.100, two-tailed).
6.2.2. Causal words

Survey participants are informed that the reports included more causal language when firm performance was bad than when firm
performance was good. They then rate four potential explanations for this finding. As with our other questions, the order in which the
potential explanations were presented was randomized. The four explanations and results are summarized in Table 6 Panel B.31
Directionally, survey participants agreed most strongly with the explanation that managers intentionally try to provide more in-
formation about the reasons for performance when performance is bad in order to satisfy investors’ demand. This is the only ex-
planation where the 95% confidence interval for the mean did not overlap with the 95% confidence interval of the other explanations
(not tabulated). Further, pairwise comparisons reveal that participants rated this explanation significantly higher than any other
explanation (all p < 0.005, two-tailed). The explanation suggesting managers intentionally provide more causal explanation when
performance is bad with the specific intention of hiding poor performance is also marginally lower than the explanation suggesting
managers provide less causal explanation when performance is good with the specific intention of avoiding scrutiny about the reasons
for positive performance (p = 0.086, two-tailed).
6.2.3. Focus on the future

Survey participants are informed that the reports were more focused on the future when they were describing bad performance
rather than good performance. Survey participants rate four potential explanations for this finding. Again, the order in which the
potential explanations were presented was randomized. The four explanations and results are summarized in Table 6 Panel C.32
Directionally, survey participants agreed most strongly with the explanation that managers intentionally try to provide more in-
formation about how performance is likely to improve in the future when performance is bad in order to satisfy investors’ demand for
information. This is the only explanation where the 95% confidence interval for the mean did not overlap with the 95% confidence
interval of the other explanations (not tabulated). Further, pairwise comparisons reveal that participants rated this explanation
29
A less readable disclosure was defined as one that uses language that goes against some of the suggestions made by the Securities and Exchange Commission
(SEC) to use Plain English in firm disclosures. In addition, less readable disclosures were described as using longer sentences, more complex synonyms, more passive
voice, etc.
30
A repeated measures ANOVA (with participant as a random variable) reveals that at least one of the explanations is different (F(4, 535.6) = 14.06; p < 0.001, not
tabulated).
31
tabulated).
32
tabulated).
395
Table 6
Survey descriptive statistics and pairwise comparisons –participant ratings of potential explanations for readability, future focus, and causal words results.
Explanation Rating mean Pairwise comparisonsa

(Median)
Panel A. Readability
Managers intentionally write less readable reports when performance is bad with the specific intention of 59.94 B
hiding poor performance. (67)
Managers intentionally write more readable reports when performance is good with the specific intention of 76.41 A
highlighting positive performance. (80)
Bad news is inherently more difficult to discuss than good news, which results in less readable language in 63.08 B
reports when news is bad and more readable language in reports when news is good. (70)
Managers intentionally try to provide more information when performance is bad, in order to satisfy 57.39 B
investors’ demand, which results in less readable language in reports. (64)
Managers unintentionally change their language when describing performance, and this change in language 55.95 B
results in less readable language in reports when performance is bad than when performance is good. (62)
Panel B. Causal words

Managers intentionally provide more causal explanation when performance is bad with the specific intention 54.37 B
of hiding poor performance. (56)
Managers intentionally provide less causal explanation when performance is good with the specific intention 47.15 B
of avoiding scrutiny about the reasons for positive performance. (50)
Managers intentionally try to provide more information about the reasons for performance when performance 63.56 A
is bad, in order to satisfy investors’ demand, which results in reports that include more causal language. (70)
Managers unintentionally change their language when describing performance, and this change in language 51.02 B
corresponds with the use of fewer causal words when news is good and more causal words when news is (50)
bad.
Panel C. Future focus

Managers intentionally shift their discussion to the future when performance is bad with the specific intention 65.15 B
of hiding poor performance. (71)
Managers intentionally shift their discussion to the past when performance is good with the specific intention 70.86 B
of highlighting positive performance. (76)
Managers intentionally try to provide more information about how performance is likely to improve in the 79.45 A
future when performance is bad, in order to satisfy investors’ demand, which results in reports that use (81)
language that focuses more on the future.
Managers unintentionally change their language when describing performance, and this change in language 51.65 C
results in more focus on the future when performance is bad than when performance is good. (50)
Table 6 presents descriptive statistics and pairwise comparisons for survey participants’ responses to questions related to the pattern of results observed in our
experiment. In the survey, 144 experienced managers are presented with a summary of three of the differences observed in our experiment (readability, focus on the
future, and causal words) and asked to rate, based on their own past experience, the extent to which several factors may have contributed to the characteristics of the
performance reports. For readability, survey participants are informed that the reports were less readable when they were describing poor performance than when they
were describing good performance. Survey participants rate five potential explanations for this finding on a 101-point scale (endpoints: 0 = “very unlikely” to
100 = “very likely” to explain differences in readability). For causal words, survey participants are informed that the reports included more causal language when firm
performance was bad than when firm performance was good. Survey participants rate four potential explanations for this finding on a 101-point scale (endpoints:
0 = “very likely” to 100 = “very unlikely” to explain differences in causal language). For focus on the future, survey participants are informed that the reports were
more focused on the future when they were describing bad performance rather than good performance. Survey participants rate four potential explanations for this
finding on a 101-point scale (endpoints: 0 = “very unlikely” to 100 = “very likely” to explain differences in future focus).
a
All pairwise comparisons are made using Tukey's honest significant difference test, with the Tukey–Kramer adjustment for multiple comparisons. Explanations not
connected by the same letter are significantly different (p ≤ 0.050, two-tailed).
significantly higher than any other explanation (all p < 0.012, two-tailed), and participants agreed least with the explanation that the
increased focus on the future is unintentional (all p < 0.001, two-tailed).
6.2.4. Disclosure choice

Finally, survey participants choose between two disclosure options (one more readable and one less readable) for describing poor
performance in their firm. Of the 135 participants who responded to this question, 84 (62.22%) chose the more readable disclosure
while 51 (37.78%) chose the less readable disclosure. This difference is significantly greater than chance (χ2 = 8.15; p = 0.005, not
tabulated).
7. Conclusion
Using two experiments and a survey of experienced managers, we investigate the determinants of disclosure readability and other
linguistic characteristics in a controlled setting. In our primary experiment, we find that participants provide reports that are sig-
nificantly less readable when performance is bad than when performance is good, particularly when participants have a stronger self-
enhancement motive in the form of a reporting goal to portray the firm as favorably as possible. In our supplemental experiment, we
find some evidence that participants provide less readable bad news reports when they have a reporting goal to portray the firm in the
396
least unfavorable light possible, rather than in as favorable a light as possible. In both experiments, our results do not appear to be
driven by intentional obfuscation of poor performance. When directly asked about the reports they have prepared, there is no
indication of intentional obfuscation in participants’ perceptions of the readability of their reports or their ratings of the extent to
which they were motivated to make the report easier or more difficult to read. Further, our survey participants believe the most likely
explanation for our pattern of results is that managers increase the readability of good news disclosures to highlight the positive
performance. Combined, the results do not appear to support arguments made in prior literature that managers intentionally ob-
fuscate poor performance by making disclosures less readable.
In addition to the results discussed above on readability, we also provide evidence on how other linguistic choices are affected by
variation in firm performance and reporting goals. Specifically, we find that participants use more passive voice and fewer first
person singular pronouns when news is bad – a technique that distances the manager from the information conveyed. Further, the
effect of bad news on the use of passive voice is larger when participants have a favorable reporting goal. We also find that parti-
cipants include more causal words and use words that focus more on the future when performance is bad than when performance is
good. Debriefing questions that directly ask participants about their reporting choices suggest that they are aware of these differences
and survey participants believe the most likely explanation for these results is that managers try to provide more information about
the future in order to satisfy investors’ demand. Results from a supplemental experiment provide additional support for the idea that,
to frame poor performance in a positive light, managers provide causal explanations for poor performance, focus more on the future,
use more passive voice and fewer personal pronouns, and increase the readability of positive information in their disclosures. The
supplemental experiment also suggests that, to the extent that managers view their goals when reporting bad news to be presenting
the results in the “least unfavorable” manner possible, use of more negations which decreases readability might be expected. Overall,
our results support the idea that when reporting bad news, individuals distance themselves from poor performance by using passive
voice and fewer first person singular pronouns, provide additional explanation, and focus more on future expectations.
Our study adds to the growing literature investigating the language used in disclosures. Controlling for actual firm performance
and other characteristics, recent archival studies use methods from computational linguistics to analyze large bodies of text, as
suggested by Core (2001). Our study, on the other hand, uses a controlled experiment to provide complementary evidence on
managers’ disclosure choices, holding constant other factors that are not of primary interest, while using dependent measures that are
comparable to recent archival studies.
Our use of an experiment allows us to complement prior archival work, while isolating the effects of individual drivers of
linguistic characteristics of disclosures. For example, prior literature has argued that bad news disclosures may be less readable, at
least in part, due to the inherent difficulty of describing poor performance (Bloomfield, 2008) or the complexity of the operating
environment in times of poor performance (Guay et al., 2016; Bushee et al., 2018). We hold environmental complexity constant by
using identical underlying facts across all conditions in our setting in order to isolate the effects of firm performance and reporting
goals on linguistic characteristics. Future work could further examine how the complexity of the operating environment affects the
language used in disclosures.
This study has some important limitations. First, we use a setting where participants describe hypothetical performance, rather
than performance on a real task (e.g., intelligence tasks, manufacturing tasks, etc.). This mitigates potential confounds between
linguistic choices and participant characteristics, while also presenting participants with a setting that is rich enough to allow them to
draw on their experiences when describing firm performance. A consequent downside of asking participants to describe hypothetical
performance is that it potentially reduces their personal involvement in the task and may influence their linguistic choices as well.
However, we would expect that lower personal involvement is likely to only weaken our results rather than change the directional
pattern of responses or the resulting inferences.
Second, disclosures provided in the real world are influenced by consultation with legal departments, public-relations profes-
sionals, etc. Consequently, our study does not strictly capture the final disclosures that might actually be provided to investors.
Different types of disclosures likely vary with respect to the level of third-party input (see, e.g., Dikolli et al., 2015). Future research
could also layer in additional features that might affect linguistic choices of reporting complexity. Some interesting possibilities for
factors that might affect reporting complexity include managers’ experience, managers’ reporting reputations, different incentive
structures, legal considerations, or different types of target investors.
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Journal of Accounting and Economics 65 (2018) 380–398

Contents lists available at ScienceDirect

Journal of Accounting and Economics

Firm performance, reporting goals, and language choices in

2. Background and development of hypotheses

2.1. Disclosure readability

2.2. Linguistic characteristics and managers’ association with the message

2.3. Causal explanations for performance and focus on the future

2.3.1. Causal explanations

2.3.2. Focus on the future

3. Primary experiment: method

3.2. Design and manipulations

3.3. Task and procedure

3.4. Dependent measures

3.4.1. Readability measure

3.4.2. Association with the message measures

3.4.3. Causal explanation measure

3.4.4. Focus on the future measure

3.4.5. Relation between readability and other measures

4. Primary experiment: results

4.1. Manipulation checks

4.2. Tests of readability hypotheses

Performance Reporting goal Overall

Panel A. Descriptive statistics - mean and (standard deviation), by condition

Bad 11.71 10.48 11.10

Overall 11.20 13.53 12.32

Panel B. Results of analysis of variance (ANOVA) – Test of H1

Source S.S. d.f. M.S. F-statistic p-value

Performance 328.45 1 328.45 2.50 0.058a

4.3. Tests of hypotheses related to managers’ association with the message

Panel A. Descriptive Statistics – mean and (standard deviation), by condition

Panel B. Results of analysis of variance (ANOVA)

Source S.S. d.f. M.S. F-statistic p-value

Performance 0.62 1 0.62 0.19 0.665

Measure: Motivated to make your report easier or more diﬃcult to understand

Source S.S. d.f. M.S. F-statistic p-value

Performance 1.34 1 1.34 0.32 0.570

Panel A. Descriptive statistics – mean and (standard deviation), by conditiona

Passive voice 1.48 1.06 1.18 1.88

Causal explanation 4.09 4.38 4.90 5.33

Focus on the future 0.20 0.22 0.38 0.32

Panel B. Results of analysis of variance (ANOVA)

Source S.S. d.f. M.S. F-statistic p-value

Performance 5.62 1 5.62 0.60 0.220b

Measure: Passive voice (Test of H3)

Performance 3.39 1 3.39 2.51 < 0.057b

Measure: Causal explanation words (Test of H4)

Performance 39.48 1 39.48 7.60 0.003b

Measure: Focus on the future (Test of H5)

Performance 1.02 1 1.02 16.90 < 0.001b

Panel A. Descriptive statistics – mean and (standard deviation), by condition

Panel B. Results of analysis of variance (ANOVA)

Source S.S. d.f. M.S. F-statistic p-value

Performance 14.68 1 14.68 0.58 0.448

Measure: Active vs. passive voice

Performance 0.15 1 0.15 0.02 0.882

Measure: Just the facts vs. explaining underlying causes

Performance 36.60 1 36.60 6.85 0.010

Measure: Focus on past performance vs. expectations for future performance

Performance 162.33 1 162.33 27.05 < 0.001

Measure “Most Favorable” condition “Least Unfavorable” condition p-value

Panel B. Supplemental experiment results for individual component measures of readability

6. Survey of experienced managers