How Does Managers' Humor Influence Investor Judgments?

Abstract

Managers use humor when communicating with market participants, and research finds that successfully using humor can provide several benefits for managers. However, theory suggests that these benefits could give rise to potential costs for managers. Furthermore, using humor in financial reporting settings is risky because there is a possibility that humor could fail. I conduct an experiment to examine how managers’ humor influences investors’ information processing and subsequent valuation judgments. Drawing on psychology theory, I predict and find that investors engage in greater information processing when managers’ humor fails than when managers’ humor is successful. To test for differences in information processing, I examine investors’ processing of information about a firm’s earnings persistence. Consistent with differences in information processing, investors’ valuation judgments are more sensitive to differences in earnings persistence after failed humor than after successful humor. My study contributes to the literature examining how manager disclosure style influences investor judgments and also has practical implications for managers considering the costs and benefits of using humor.