Language in financial disclosures

Firms use financial disclosures to communicate with investors and other interested stakeholders. Although the content in disclosures is important, the language that a firm uses to communicate that content can also affect judgments and decisions. In this chapter we review the literature on the effects of linguistic choices in financial disclosures, primarily in the context of investors’ decision-making. We describe the effects of the individual words that a firm uses, as well as the effect disclosures have when a firm organizes words into a narrative that “tells the firm’s story.” Our discussion suggests that firms can use both types of language choices to communicate complex information more effectively and to strategically influence stakeholders’ beliefs about the firm.