Does Highlighting Concrete Language in Disclosures Mitigate Home Bias?
37 Pages Posted: 13 Jun 2012 Last revised: 23 Oct 2012
Date Written: October 22, 2012
Abstract
In this study we use an experiment to examine whether home bias is caused, at least in part, by a psychological bias that can be reduced by highlighting concrete language in disclosures. Our results show that, when abstract language is highlighted in a prospectus, prospective investors are significantly more willing to invest in the stock of a domestic firm than a foreign firm, but that highlighting concrete language mitigates this bias. Drawing on psychology theory, we predict and find that the debiasing effect of highlighting concrete language operates via investors’ subjective feelings of comfort with evaluating a prospective investment. Further, using a controlled experiment allows us to manipulate highlighted language without changing differences in investors’ access to or ability to interpret information about the foreign and domestic firm, thus ruling out differences in information as a sufficient explanation for our findings. Our results demonstrate a simple, yet potentially powerful reporting tool of highlighting concrete language in disclosures for reducing sub-optimal decisions among investors, which may provide benefits at the individual, firm and societal level.
Keywords: home bias, corporate disclosure, investor comfort, concrete language, psychological distance
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