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Effect of Readability and Complexity on Naive Investors Decisions: An Experimental Study in an Emerging Economy

Badawy H and Ibrahim A

Purpose of this paper: The purpose of this paper is to investigate the impact of the readability and complexity levels of financial disclosures on naïve investors’ willingness to invest and their stock valuation judgements.

Design/methodology/approach: Two experiments were conducted during the study. The first experiment is a between subject experimental design and is conducted to investigate the impact of different readability levels (less readable Vs more readable) on naïve investors’ investment judgements. The second experiment is a within subject experimental design and is conducted to test the impact of different complexity levels (more complex Vs less complex) on naïve investors’ judgements. Non-parametric statistical tests were used to test the research hypotheses.

Findings: The impact of readability level on investors’ comfort and willingness to invest was clear and significant in the case of more complex negative information (options case) as investors’ willingness to invest was lower in case of more readable negative information on options, but that was not the result in case of the less complex negative information (convertible bonds case). Readability levels affected investors’ stock valuation whether the information presented is less complex or more complex. Investors’ stock valuation was lower in case of less readable information than that in the case of more readable information. As for the impact of complexity, the results didn’t show significant impact of the complexity levels on the investors’ willingness to invest and their stock valuation.

Research limitations/implications: This paper uses undergraduate students registered in the English section in the faculty of commerce of Alexandria University as a proxy for naive investors. Those students passed three courses of accounting and have basic knowledge in financial disclosures. Real investors were difficult to recruit as subjects for the experiment conducted.

Social and Practical implications: The results of the study imply that different readability levels can have a significant impact on investors’ willingness to invest in case the information presented is more complex and their stock valuation, whether the information presented is less complex or more complex.

What is original/value of paper? This paper is the first to examine the impact of readability and complexity separately. The paper contributes to the existing literature examining the readability and complexity of financial disclosures on investors’ decisions and judgements."