Bo Zhou

Bio: Bo Zhou is an academic researcher from Dalian University of Technology. The author has contributed to research in topics: Reynolds number & Vortex shedding. The author has an hindex of 11, co-authored 43 publications receiving 552 citations. Previous affiliations of Bo Zhou include Shanghai University of Finance and Economics & Nanyang Technological University.

When the Use of Positive Language Backfires: The Joint Effect of Tone, Readability, and Investor Sophistication on Earnings Judgments

Abstract: Recent studies document that market participants react positively to the positive language sentiment or tone embedded in financial disclosures, and that investors' reactions to negative news are more muted with poor disclosure readability. However, while language sentiment and readability co-occur in practice, their joint effects remain largely unexplored. In an experiment with MBA students as participants, we investigate how the effect of language sentiment varies with readability and investor sophistication level. We find that language sentiment influences investors' judgments when readability is low, but not when readability is high. Specifically, when readability is low, disclosures couched in positive language lead to higher earnings judgments for less sophisticated investors, but lower earnings judgments for more sophisticated investors. These findings show that the main effects of readability and language sentiment documented in prior studies have boundary effects, and may reverse when both variables are jointly considered along with investor sophistication

How Does Readability Influence Investors’ Judgments? Consistency of Benchmark Performance Matters

Abstract: We conduct an experiment to investigate how readability (high vs. low) and benchmark performance consistency (consistent vs. inconsistent) influence investors’ judgments. Using prior management guidance and year-ago quarter performance as two benchmarks against which to assess actual earnings performance, we manipulate whether performance evaluations relative to these two benchmarks are consistent with each other. Our findings show that readability has a magnified impact on investors’ performance judgments when benchmark performance is inconsistent than when it is consistent. We find that high readability improves investors’ understanding of the firm’s positive (negative) current period performance relative to year-ago quarter performance, and this leads to higher (or lower) performance judgment. We also find that readability influences disclosure credibility and performance judgment through processing fluency only in the absence of conflicting benchmark performance, but not in its presence. These findings provide insights on the mechanisms (i.e., understanding and processing fluency) through which readability influences investors’ judgments, and the conditions under which each operates.

How does readability influence investors' judgments? Consistency of benchmark performance matters

Abstract: We conduct two experiments to investigate how readability (high versus low) and benchmark performance consistency (consistent versus inconsistent) influence investors' judgments. Using prior management guidance and year-ago quarter performance as two benchmarks against which to assess actual earnings performance, we manipulate whether the valence of guidance performance (positive or negative) and the valence of trend performance (positive or negative) are consistent with each other. We also manipulate the readability of trend performance in our main experiment. Our results show that when benchmark performance is inconsistent, higher as opposed to lower readability of positive (negative) trend performance leads to more (less) favorable investors' performance judgments. This effect of readability is smaller when benchmark performance is consistent. We also show that higher readability in the inconsistent benchmark performance condition improves investors' understanding of the firm's current-quart...

Advanced Soil Mechanics

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When the Use of Positive Language Backfires: The Joint Effect of Tone, Readability, and Investor Sophistication on Earnings Judgments

Abstract: Recent studies document that market participants react positively to the positive language sentiment or tone embedded in financial disclosures, and that investors' reactions to negative news are more muted with poor disclosure readability. However, while language sentiment and readability co-occur in practice, their joint effects remain largely unexplored. In an experiment with MBA students as participants, we investigate how the effect of language sentiment varies with readability and investor sophistication level. We find that language sentiment influences investors' judgments when readability is low, but not when readability is high. Specifically, when readability is low, disclosures couched in positive language lead to higher earnings judgments for less sophisticated investors, but lower earnings judgments for more sophisticated investors. These findings show that the main effects of readability and language sentiment documented in prior studies have boundary effects, and may reverse when both variables are jointly considered along with investor sophistication