Earnings-Announcement Narrative and Investor Judgment

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ACCOUNTING HORIZONS American Accounting Association

Vol. 32, No. 3 DOI: 10.2308/acch-52121

September 2018

pp. 123–143

Earnings-Announcement Narrative and Investor Judgment

Elaine Henry

Stevens Institute of Technology

Marietta Peytcheva

Lehigh University

SYNOPSIS: This study examines how emphasis framing in narrative disclosures, and the investor characteristics of

numeracy and persuadability, affect investors’ ability to discriminate between firms’ better and worse financial

performance. In an experiment with 264 participants from the general population, we manipulate emphasis framing in

earnings announcement narratives as neutral, consistent, or inconsistent with the firm’s performance. We find that

investors are better able to distinguish between good and poor firm performance when the accompanying disclosure

emphasizes information that is consistent with the firm’s performance. Further, persuadability reduces, but numeracy

increases, investors’ ability to distinguish between good and poor performance. However, our results also indicate

that the inclusion of biased numerical information in narrative disclosures may have a greater negative effect on

higher numerates than on lower numerates, consistent with theory suggesting that more numerate individuals tend to

focus on and draw affective meaning from numbers.

JEL Classifications: M41.

Keywords: earnings-announcement narrative; investor judgment; framing effects; emphasis framing; numeracy;

persuadability.

INTRODUCTION

We use framing theory to examine the separate and joint effects of emphasis framing in earnings-announcement

narratives and investor numeracy on investors’ ability to evaluate firms’ financial performance. We examine

emphasis framing that is inconsistent versus consistent with the firm’s financial performance, and we consider two

ways in which inconsistent framing can be manipulated in earnings narratives: through the selective use of metrics (i.e.,

numerical amounts); or through the use of both metrics and interpretive language. We also examine the effect of persuadability

on investors’ judgments.

Emphasis framing, a construct originating in communications theory and political science, involves the selective

highlighting of different aspects of the same issue (Chong and Druckman 2007a,2007b;Druckman 2004). Examples of

emphasis framing from communications and political science research include asking whether enough is being spent on

‘‘ assistance to the poor’’ versus ‘‘welfare’’ (Rasinski 1989) or prefacing a question on whether a public meeting of a hate group

should be allowed, either with ‘‘ given the importance of free speech’’ or ‘‘ given the risk of violence’’ (Chong and Druckman

2007a;Sniderman and Theriault 2004).

By selectively highlighting specific facets of the issue at hand, emphasis framing can

influence decision makers’ judgment and behavior.

The narrative accompanying firms’ earnings announcements can be used by management as an important vehicle for

influencing investors’ impressions of the firm’s performance (DellaVigna and Gentzkow 2010;Han and Tan 2010;Thomas

We thank workshop participants at the University of Miami for comments on an earlier version of the paper, and we appreciate helpful guidance and

suggestions from the editor and two anonymous referees.

Editor’s note: Accepted by Jeffrey Hales, under the Senior Editorship of Teri Lombardi Yohn.

Submitted: July 2017

Accepted: March 2018

Published Online: April 2018

Political science research usually refers to this type of framing as ‘‘ emphasis’’ or ‘‘issue’’ framing (Druckman 2004), while communications research

refers to it as ‘‘ news framing’’ (Entman 1993)or‘‘ emphasis framing’’ (Chong and Druckman 2007a). For consistency, we use the term ‘‘ emphasis

framing’’ throughout this paper.

123

1997;Yuthas, Rogers, and Dillard 2002). Frederickson and Miller (2004, 670) observe that ‘‘ given the quantitative nature of

most accounting information, future accounting research should consider the implications of qualitative transformations of

quantitative information.’’ Qualitative transformation of quantitative information from the financial statements is a key feature

of the narrative components of earnings announcements. Recognizing the importance of presentation and language used in

earnings-announcement narratives, recent accounting research has examined the specific effects of tone, language vividness,

and associating the narrative message with the firm’s CEO (Asay, Libby, and Rennekamp 2014;Hales, Kuang, and

Venkataraman 2011;Rennekamp 2012). We extend this research by examining how emphasis framing in the earnings-

announcement narrative affects investors’ ability to discriminate between better and worse financial performance. Management

can selectively use emphasis in describing financial performance to mislead investors—a strategy described in a recent New

York Times article about a politician’s biased presentation of her former firm’s financial results (Sorkin 2015). Commenting on

the candidate’s claim of an extremely high increase in growth rate, the article explains that the ‘‘ problem isn’t that the numbers

aren’t accurate—they are,’’ but selective emphasis on one aspect of performance (revenue growth achieved via an aggressive

acquisition strategy) as opposed to more meaningful measures of ‘‘ real business success’’ (e.g., growth in profitability) served to

mislead about her business record (Sorkin 2015).

Earnings announcements provide a suitable context for studying the effects of emphasis framing, because management

tends to emphasize favorable metrics in earnings announcements (Bhattacharya, Black, Christensen, and Mergenthaler 2007;

Bowen, Davis, and Matsumoto 2005;Elliott 2006;Frederickson and Miller 2004;Krische 2005). Management can use the

narrative accompanying earnings data to selectively highlight numbers, make favorable comparisons, and/or add biased

interpretations of metrics. We examine how emphasis framing that is inconsistent versus consistent with the firm’s financial

performance influences investors’ evaluation of the firm’s performance. Specifically, we investigate the effects of emphasis

framing accomplished either through the selective use of metrics, or through the use of both metrics and interpretive language.

We expect that emphasis framing that is consistent with the firm’s financial performance will have a positive effect on

investors’ ability to discriminate between better and worse financial performance, while inconsistent emphasis framing will

have a negative effect.

We also examine the effects of investor numeracy and its interactions with emphasis framing. Numeracy represents an

individual’s ability to understand and work with numbers (Dieckmann, Slovic, and Peters 2009;Reyna and Brainerd 2008;

Reyna, Nelson, Han, and Dieckmann 2009). Numeracy does not capture a person’s general intelligence, but rather the way the

person processes, and relies on, numerical information (Peters et al. 2006). Research in psychology has shown that individuals

higher in numeracy are better at interpreting risk and probability concepts, and making decisions under uncertainty (Dieckmann

et al. 2009;Reyna and Brainerd 2008;Reyna et al. 2009). More numerate individuals are also less likely to be influenced by

different formats of data presentation, such as presenting data in probability versus frequency format (Peters et al. 2006). In line

with prior research, we expect that numeracy will improve investors’ ability to discriminate between better and worse financial

performance. However, individuals high in numeracy tend to draw stronger affective meaning from numbers and metric

comparisons, and ‘‘ this tendency may sometimes lead to worse decisions’’ (Peters et al. 2006, 407).

Our study is the first to examine how emphasis framing via selective comparative metrics in the earnings-announcement

narrative interacts with numeracy to influence investors’ judgments. We test competing hypotheses for the interactive effect of

emphasis framing and numeracy: On the one hand, more numerate investors should be better at interpreting financial data and

disregarding the inconsistent narrative. On the other hand, more numerate investors could be more affected by inconsistent

narrative that emphasizes selective metrics. Because they tend to focus on numbers and draw stronger affective meaning from

them (Peters et al. 2006), when the numerical information presented in narrative disclosures is biased, high numerates may be

more vulnerable to an incorrect interpretation.

Because earnings announcements have a dual informational-promotional role (Henry 2008;Maat 2007), we also examine

how persuadability affects investor judgments. Persuadability is a person’s susceptibility to persuasion attempts in

communications (Friestad and Wright 1994;Petty and Cacioppo 1986). The narrative in earnings announcements is a form of

persuasive communication, where management can attempt to influence readers’ judgments (DellaVigna and Gentzkow 2010;

Han and Tan 2010;Tan, Wang, and Zhou 2014). We expect persuadability to reduce investors’ ability to discriminate between

better and worse financial performance.

We conduct an experiment with 264 participants drawn by a market research company to be representative of the general

U.S. adult population. The experimental task involves examining the earnings announcements of a better-performing company

and a worse-performing company, and rating both companies’ performance for the period.

Investors’ ability to discriminate

The sales growth, earnings growth, and return on sales of the better-performing company are designed to fall in the top quartile of Compustat

companies with assets greater than $10 million, while the measures of the worse-performing company are designed to fall in the bottom quartile of such

companies.

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between better and worse financial performance is measured as the difference between their performance ratings for the better-

performing company and the worse-performing company. All experimental conditions include identical simplified income

statements, and vary only in the emphasis in the narrative accompanying that information. All quantitative information included

in the narratives can be derived directly from the accompanying income statements.

Emphasis framing is used to manipulate the narratives as more or less favorable by selectively including and

emphasizing items from the income statement that allow for (un)favorable comparisons, by making the comparisons explicit,

by including positive (negative) evaluative adjectives, and by including interpretive statements. The experiment has four

conditions: Neutral, containing no comparative metrics and no interpretive language; Consistent: Metrics and Interpretive,

containing favorable (unfavorable) comparative metrics and interpretive language for the better-performing (worse-

performing) company; Inconsistent: Metrics Only, containing neutral narrative for the better-performing company and

favorable comparative metrics for the worse-performing company; and Inconsistent: Metrics and Interpretive, containing

unfavorable (favorable) comparative metrics and interpretive language for the better-performing (worse-performing)

company. Investor numeracy is measured with the basic numeracy measure in Elliott, Grant, and Rennekamp (2017),and

persuadability is measured with the Persuadability portion of the Multidimensional Iowa Suggestibility Scale (Kotov,

Bellman, and Watson 2004).

We find, as expected, that numeracy has a positive effect on investors’ ability to discriminate between better and

worse company performance, even after controlling for participants’ investment experience, and that persuadability has a

negative effect on investors’ judgments. Emphasis framing consistent with the companies’ financial performance improves

investors’ discriminating abilities. While inconsistent emphasis framing does not have an overall main effect on investors’

judgments, it interacts with investor numeracy and has a differential effect on judgments for higher and lower numerates.

Importantly, when inconsistent framing is accomplished via selective emphasis on comparative metrics, numeracy reduces

investors’ discriminating ability. This finding is consistent with prior research suggesting that—because high numerates

focus more heavily on numerical information and rely on number-related intuitions—in some contexts, high numerates can

be more susceptible to bias involving processing numbers than low numerates (Kahan, Peters, Dawson, and Slovic 2017;

Peters 2012;Peters et al. 2006;Reyna et al. 2009). High numerates may be more susceptible to bias specifically because of

their heightened focus on the detail of metrics and their propensity to draw affective meaning from numbers (Peters et al.

2006).

Our study offers several contributions to the literature on investor judgment. We extend research on the influence of

earnings-announcement narrative on judgments and provide evidence on the effects of emphasis framing and investor

numeracy in the context of financial disclosure. We demonstrate the interactive effects of emphasis framing and numeracy on

investors’ assessments of good and bad financial performance. Finally, given the partially promotional role of earnings-

announcement narrative, we highlight the negative effect of persuadability on investors’ judgments.

Ours is the first study to show that more numerate investors’ judgments can be more negatively affected by inconsistent

emphasis framing in financial disclosure narratives that is achieved through the selective emphasis on numbers. This somewhat

counterintuitive finding has important implications for investors’ assessments of accounting disclosures, because bias in the

narrative portions of such disclosures is often accomplished through selective highlighting of favorable metrics. Since more

numerate investors are more likely to extract meaning from numbers and focus on the metrics in the financial disclosure

narrative, they may be more likely to fall prey to manipulation accomplished by management’s emphasis on favorable numbers

or omission of unfavorable metrics and comparisons.

The implications of our study are relevant for both current and potential non-professional investors. The SEC highlights the

importance of protecting first-time investors in stating, ‘‘ As more and more first-time investors turn to the markets to help

secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever’’

(SEC 2013). In examining our research questions with a participant pool that is representative of the broad U.S. population, we

aim to provide implications for the broadest possible pool of current and potential investors. The SEC’s Study Regarding

Financial Literacy Among Investors finds that ‘‘ U.S. retail investors lack basic financial literacy’’ (SEC 2012, iii), suggesting

that examining how emphasis framing in earnings releases influences a representative sample of the U.S. general population

can provide important insights about current and potential retail investors.

Beyond considerations for the general population of current and potential retail investors, our findings have practical

implications for other constituencies. For regulators and educators, our findings highlight the importance of endeavors

promoting numerical literacy as well as critical thinking skills to offset both the negative effects of low numeracy and high

persuadability. Preparers and users of financial information might find useful the broader implications of our findings, that high

numerates may be more vulnerable to biased framing achieved by inclusion of flattering financial metrics within narrative that

is serving a dual informational-promotional role.

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THEORY AND HYPOTHESIS DEVELOPMENT

Effect of Emphasis Framing on Investor Judgment

Literature on framing effects across various domains of research demonstrates that objective, factual information can

influence people differently depending on the words that are used to communicate those facts (Druckman 2001;Kahneman and

Tversky 1984;Tversky and Kahneman 1981,1986). For example, medical decisions change if their potential consequences are

presented in terms of survival rates versus mortality rates (Kahneman 2002;Tversky and Kahneman 1981); firms’ capital

investment choices are affected by presenting the consequences as factories and jobs gained versus factories and jobs lost

(Bazerman 2002), and auditors require more substantive testing when instructed to evaluate the ‘‘ risk’’ rather than the

‘‘ strength’’ of an internal control system (Emby 1994).

Framing effects include equivalency framing, where the same information is presented in different light (e.g., loss versus

gain, risk versus strength) and emphasis framing, where different aspects of the same issue are emphasized (Chong and

Druckman 2007a,b;Druckman 2001,2004). For example, Rasinski (1989) finds that asking whether enough is spent on

‘‘ assistance to the poor’’ results in greater support for such spending than framing the question as whether enough is spent on

‘‘ welfare.’’ Bleich (2007) finds that support for U.S. spending on HIV/AIDS in other countries is greater when the phrase

‘‘ foreign aid’’ is included in the question than when the phrase is omitted. Similarly, emphasizing the benefits from medical tests

is more effective in motivating people to obtain such tests than emphasizing the costs of not obtaining the tests (Rivers,

Salovey, Pizarro, Pizarro, and Schneider 2005). In communication theory, emphasis framing involves highlighting aspects of a

situation ‘‘ in such a way as to promote a particular problem definition, causal interpretation, moral evaluation, and/or treatment

recommendation for the item described’’ (Entman 1993, 52). In this study, we focus on emphasis framing because it is most

relevant to the examination of how earnings announcements influence investors’ evaluation of firms’ performance.

Although the construct of emphasis framing from communication theory and political science is somewhat related to

constructs such as salience, tone, and vividness, it is distinct from these constructs. With regard to salience versus emphasis

framing, there are two main considerations. First, salience can be increased by various constructs that are quite different from

salience itself. For example, in language theory, three constructs viewed as antecedents to salience are vividness, uniqueness,

and pervasiveness (Pattabhiraman 1993;Kecskes 2011). These constructs are distinct from salience, although they affect it.

Accounting research shows that constructs such as disclosure readability, length, and complexity (Li 2008;Miller 2010;

Rennekamp 2012;You and Zhang 2009), as well as disclosure placement or labeling (Hirst and Hopkins 1998;Maines and

McDaniel 2000), can increase the salience of important financial and nonfinancial information. Similarly, emphasis framing can

be an antecedent to salience. Second, emphasis framing can affect not only salience, but also valence. Emphasizing selected

aspects of the issue at hand influences the valence of the narrative, such as, in the example of discussing whether the KKK

should be permitted to hold a public meeting ‘‘ given the risk of violence’’ or ‘‘ given the importance of free speech’’ (Chong and

Druckman 2007a;Sniderman and Theriault 2004).

Emphasis framing is a broader construct than tone, as framing can be accomplished not only via interpretive language

involving word choice that could have an impact on tone measurements, but also via selective emphasis on numeric

information. While emphasis framing is broader than just tone, manipulating the frame of the narrative can affect tone. For

example, framing a choice in terms of mortality versus survival, or gaining versus losing, to use Tversky and Kahneman’s

(1986) classic examples, could be argued to manipulate tone as well; so too can emphasizing ‘‘ free speech’’ versus ‘‘ the risk of

violence’’ (Chong and Druckman 2007a;Sniderman and Theriault 2004).

Emphasis framing is also distinct from the vividness of language, although both constructs relate to the persuasion

literature (Bullock and Vedlitz 2017;Hales et al. 2011;Nelson, Oxley, and Clawson 1997;Nisbett and Ross 1980). Emphasis

framing, as used in communication theory and political science research, involves the strategic highlighting—through

elaboration, repetition, explication, or evaluative statements—of selected aspects of an issue (Bullock and Vedlitz 2017;

Druckman 2001). Vivid language is imagery provoking and emotionally interesting; in contrast, pallid language is bland,

sterile, and unemotional (Hales et al. 2011;Nisbett and Ross 1980). Vividness need not determine, or be determined by,

valence. The distinction is demonstrated in Hales et al.’s (2011) examination of the effect of vivid versus pallid language on

investors’ judgment, which manipulates the vividness of both positive-valenced and negative-valenced news. In contrast,

emphasis framing involves accentuating positive versus negative aspects of an issue in order to achieve a desired effect.

Emphasis framing can include selection of particular attributes or selection of particular words to describe a situation,

based on the assumption that ‘‘ subtle changes in the wording of the description of a situation might affect how audience

members think about this situation’’ (Scheufele 2000, 309). In other words, frames are established by what is discussed and by

the words chosen for the discussion. Zillmann, Chen, Knobloch, and Callison (2004, 59) write, ‘‘It can be considered amply

established that variations in news frames are capable of creating substantial differences in the audience’s responses—in the

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interpretation and comprehension of the news.’’ This relationship is directly analogous to the relationship between the

presentation of earnings news and investors’ responses.

Financial disclosures in general, and earnings announcements in particular, provide a unique opportunity to study emphasis

framing because, unlike many other types of communication, they provide two simultaneous communications about the same

set of past events. The financial statements provide a non-biased presentation (or at least as non-biased as accounting standards

can accomplish), while the narrative components provide an additional textual presentation about the past events. When—as in

our experiment—there is no intentional bias in the financial statements and the narrative component contains no information

beyond the information already contained in the financial statements, it is possible to assess the impact of alternative emphasis

frames within the narrative.

Prior archival research documents an association between investor reaction to earnings announcements and the positive or

negative tone of investor communications (e.g. Feldman, Govindaraj, Livnat, and Segal 2010;Henry 2006,2008;Henry and

Leone 2016;Kothari, Li, and Short 2009;Loughran and McDonald 2011) and inclusion of positive comparisons (Guillamon-

Saorin, Isidro, and Marques 2017). However, archival methodology is not fully effective in determining whether the effect

reflects true economic differences in firm performance versus ‘‘ spin,’’ i.e., differences in the language used to describe the

results. Experimental research shows that language can have a strong effect on investors’ judgments about firm performance.

Hales et al. (2011) find that the vividness of language in firm disclosures influences investor judgments when the information is

inconsistent with investors’ preferences. Elliott, Rennekamp, and White (2015) show that the use of concrete, as opposed to

abstract, language in firm disclosures increases investors’ willingness to invest in a firm. Asay et al. (2014) find that the use of

more personal pronouns in managers’ narrative disclosures amplifies investors’ reactions to both positive and negative

disclosures, and Rennekamp (2012) finds that more readable disclosures increase investors’ trust in the disclosures and elicit

stronger reactions from them. Rennekamp (2012) also discusses the importance of investment experience in this relationship,

and suggests that future research examine its effects.

We build on these studies by examining how several important aspects of emphasis framing influence investor judgment.

First, we examine how emphasis framing that is inconsistent versus consistent with the firm’s financial performance influences

investors’ assessment of the firm’s performance. Second, we examine two ways in which inconsistent emphasis framing can be

manipulated in earnings narratives: (a) through the selective use of metrics, or (b) through the use of both selective metrics and

interpretive language. Third, we examine how emphasis framing interacts with investor numeracy.

Prior research suggests that management tends to emphasize more favorable metrics in earnings releases, and that

higher-profile firms (i.e., those with greater media coverage) are more prone to selectively emphasizing the more favorable

earnings metrics (Bowen et al. 2005). Further, investors are likely to be influenced by strategic inclusion of alternative, non-

GAAP benchmarks that compare favorably with prior periods (e.g., Bhattacharya et al. 2007;Elliott 2006;Frederickson and

Miller 2004;Krische 2005). Some prior studies focus on the impact of more complex disclosures such as description of

transitory prior period items (Krische 2005), emphasis on GAAP versus non-GAAP earnings (Bowen et al. 2005;Elliott

2006;Guillamon-Saorin et al. 2017), or inclusion of a reconciliation between GAAP and non-GAAP earnings (Elliott 2006).

In contrast, we focus on narrative that includes simpler, unadjusted benchmarks such as sales and GAAP earnings that

require no further quantitative clarification.

This approach allows us to examine the effect of emphasis framing when the

comparative income statements are identical across all experimental conditions, and all quantitative information in the

narrative can be directly derived from the income statements displayed. The focus of our study is on a fundamental judgment

skill related to financial disclosures, namely the ability to discriminate between a company that performed well and one that

performed poorly.

Based on framing theory, we expect that when the emphasis framing of the narrative is directionally consistent with the

underlying performance of the company, investors would perceive a clear signal about the company’s performance, and would

align their judgments with that signal. On the other hand, when the narrative’s framing is directionally inconsistent with the

company’s underlying performance, investors would receive an attenuated, less clear signal, and their ability to discriminate

between better and worse financial performance will likely suffer. In sum, framing theory predicts that consistent (inconsistent)

emphasis framing in the earnings announcement narrative will have a positive (negative) effect on investors’ ability to

discriminate between better and worse financial performance.

H1: Emphasis framing that is consistent (inconsistent) with financial performance has a positive (negative) effect on

investors’ ability to discriminate between better and worse financial performance.

Simpler, unadjusted benchmarks mean that the income statement itself has all the numbers referenced in the narrative, and there are no calculations

required or complex adjustments, unlike in Krische (2005), which involves an adjustment to reported earnings, or Elliott (2006), in which non-GAAP

earnings exclude five separate expense items. This helps to maintain participants’ focus on the narrative.

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Effect of Numeracy on Investor Judgment

Numeracy is a person’s ability to understand and use numbers (Dieckmann et al. 2009;Fagerlin, Ubel, Smith, and

Zikmund-Fisher 2007a;Fagerlin et al. 2007b;Reyna and Brainerd 2008;Reyna et al. 2009). Peters et al. (2006, 407) define it

as ‘‘ the ability to process basic probability and numerical concepts.’’ Numeracy is distinct from both general intelligence and

education, and its effects on judgment and decision making are observed even after controlling for these factors (Dieckmann et

al. 2009;Peters and Levin 2008;Peters et al. 2006;Peters, Hart, and Fraenkel 2011). In an experiment with highly educated

participants, Dieckmann et al. (2009) find that less numerate individuals are less sensitive to numerical presentations of risk and

more likely to focus on the accompanying narrative instead. Dickert, Kleber, Peters, and Slovic (2011) show that, when

deciding whether to make donations to victims in need, both high and low numerates are influenced by the potential impact of

their donation, but the mental image of the victim influences only the decisions of low numerates. Greater numeracy is

associated with diminished influence of non-numeric information as well as increased sensitivity to numeric information (Peters

2012). Krische (2015) suggests that numeracy skills have an impact on financial decision making, and finds that numeracy

correlates with investors’ financial literacy. Elliott et al. (2017) manipulate the strategy frame of CSR reporting (global versus

local emphasis) and presentation style (highlighting words versus pictures), and find that a match between the strategy frame

and presentation style has a greater effect on less numerate investors’ willingness to invest than on more numerate investors.

We therefore expect numeracy to be an important determinant of investors’ ability to distinguish between better and worse

company performance in our study.

H2: Numeracy improves investors’ ability to discriminate between better and worse financial performance.

Although prior research has documented, in general, that numeracy has a positive effect on scientific and financial

judgment, it is not clear how numeracy would interact with targeted emphasis framing related to financial reporting—

specifically, in our study, earnings announcements. Earnings announcements contain two broad sections: a narrative section

containing mainly words but also some numerical information, and a financial statement section containing mainly numerical

information with words serving solely as labels. Emphasis framing in the earnings announcement narrative can involve

favorable interpretive language and/or the selective highlighting of financial metrics such as sales and earnings, and particularly

comparisons with prior periods. Emphasis framing involving selective focus on specific comparative metrics may in fact have a

greater impact on investors high in numeracy than investors low in numeracy.

Individuals higher in numeracy tend to rely more on number-related intuitions (Peters 2012;Reyna et al. 2009). In some

contexts, individuals high in numeracy can be more prone to irrational bias involving processing numbers than those low in

numeracy (Peters et al. 2006). This may happen ‘‘ precisely because they focus on the detail of numbers and draw more

affective meaning from numerical comparisons’’ (Peters et al. 2006, 411). In their review of numeracy research, Reyna et al.

(2009) suggest that it is not entirely clear under what conditions numeracy would decrease, rather than increase, biases, and

recommend that future research address this question. Recent numeracy research also highlights the importance of context in

determining whether irrational bias is more likely to affect high numerates or low numerates. Although individuals higher in

numeracy make better judgments when interpreting data in a neutral context, when interpreting the same data in a politically-

charged context, higher-numeracy individuals make worse decisions and are more susceptible to bias (Kahan et al. 2017).

As financial performance is expressed in terms of numbers—both in the income statement itself and in the accompanying

narrative—the general findings of prior numeracy research imply that investors higher in numeracy should be better able to

discriminate between good and bad financial performance even in the presence of earnings announcement narrative containing

inconsistent emphasis framing. However, when such inconsistent emphasis framing is achieved by selective emphasis on

particular comparative metrics within the earnings announcement narrative, the opposite can be true. Because high numerates

are more likely to anchor on comparative metrics within the narrative simply because metrics are numerical, selective emphasis

on particular comparative metrics can have a greater impact on high numerates. If the inconsistent presentation is achieved by

highlighting and repeating only flattering numerical comparisons within the narrative, high numerates may anchor on such

comparisons. Therefore, when inconsistent emphasis framing is accomplished through selective comparative metrics, investors

higher in numeracy could be more susceptible to bias, precisely due to their focus on numbers.

This interaction is more likely to occur when the emphasis framing using comparative metrics is inconsistent, rather than

consistent with the underlying company performance, for the following reasons. The communication signals in an earnings

announcement can be thought of as having a ‘true’ performance component (i.e., the income statement itself and narrative that

contains neutral or relatively unbiased recitation of items in the income statement) and an emphasis framing component that is

either consistent or inconsistent with the ‘‘ true’’ component. When both components are consistently positive (or consistently

negative), the signal is clearly positive (or negative), and likely to be perceived as positive (or negative) by investors, regardless

of their numeracy. However, if one component is positive while the other is negative, the clarity of the signal—and investors’

reactions to it—can differ, depending on their level of numeracy. The metrics-focused emphasis framing can dominate the

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signal to a greater extent for high numerates than for low numerates. This differential effect could lead to an interaction between

inconsistent emphasis framing and numeracy, where the metrics-focused emphasis framing can attenuate the ‘‘ true’’ component,

and distort the signal.

Metrics-focused emphasis framing that is consistent with the firm’s underlying performance would not attenuate its effect

on investors, and would be interpreted as consistently positive or negative, regardless of numeracy, resulting in a main effect in

the consistent condition.

Conversely, when the metrics-focused emphasis framing is inconsistent with the firm’s performance,

the ‘‘ true’’ component would be attenuated and the clarity of the overall signal would be decreased. High numerates could

perceive the metrics-focused emphasis framing component as stronger, and that component could even dominate their overall

perception of the signal.

In view of the opposing theoretical expectations for the interaction between numeracy and inconsistent emphasis framing,

we propose a non-directional interaction hypothesis below.

H3: Inconsistent emphasis framing via selective comparative metrics will interact with investor numeracy to influence

investors’ ability to discriminate between better and worse financial performance.

Persuadability

Given that earnings announcements have a dual informational-promotional role (Henry 2008;Maat 2007), it is important

to examine the effect of investor persuadability, the tendency to be persuaded by communications, on investors’ response to

earnings announcements. The earnings announcement narrative is a form of persuasive communication aimed at influencing

investors’ beliefs about the performance of the company (DellaVigna and Gentzkow 2010;Han and Tan 2010;Tan et al. 2014;

Thomas 1997;Yuthas et al. 2002). Persuasion is defined as the act of influencing another’s attitudes, beliefs, and behavior

(Friestad and Wright 1994;Petty and Cacioppo 1986). Persuadability influences how a person responds to messages intended

to change his or her attitudes or behavior (Janis 1954,1955). The more persuadable a person is, the easier it is for a persuasive

communication to alter the person’s beliefs and behavior. Highly persuadable individuals generally have lower need for

cognition and critical thinking (Haugtvedt and Petty 1992;Haugtvedt, Petty, and Cacioppo 1992;Shestowsky, Wegener, and

Fabrigar 1998). We therefore expect that persuadability will be negatively related to investors’ ability to distinguish between

better and worse financial performance.

Earnings-Announcement Narrative and Investor Judgment 129