We conduct two experiments to investigate how readability (high versus low) and benchmark performance consistency (consistent versus inconsistent) influence investors' judgments. Using prior management guidance and year-ago quarter performance as two benchmarks against which to assess actual earnings performance, we manipulate whether the valence of guidance performance (positive or negative) and the valence of trend performance (positive or negative) are consistent with each other. We also manipulate the readability of trend performance in our main experiment. Our results show that when benchmark performance is inconsistent, higher as opposed to lower readability of positive (negative) trend performance leads to more (less) favorable investors' performance judgments. This effect of readability is smaller when benchmark performance is consistent. We also show that higher readability in the inconsistent benchmark performance condition improves investors' understanding of the firm's current-quarter performance, which in turn influences their judgments on the firm's future performance. In a supplementary experiment, we manipulate the readability of guidance performance in an inconsistent benchmark performance setting, and replicate the key finding that higher readability of positive guidance performance leads to more positive judgment on the firm's future performance.

We investigate whether and how a “critical audit matter” (CAM) disclosure affects managers' real operating decisions in two contexts (issuing a loan that decreases versus increases the average risk profile of loan portfolios, or choosing to hedge versus speculate on commodity risk). We expect that a CAM disclosure increases disclosure costs and implies expanded auditor support for both types of activities, but we expect implied auditor support to be valued more highly for risk-increasing than for risk-decreasing activities. As a result, we predict that a CAM disclosure decreases managers' risk-decreasing activities (due to increased disclosure costs) more than managers' risk-increasing activities (as the implied auditor support counteracts the increased disclosure costs). We find evidence consistent with our prediction across multiple experiments. Our study sheds light on the unintended consequences of a CAM disclosure and provides insight to relevant parties as the new standard goes into effect.

Informed by Perceptual Deterrence Theory, we conduct multiple experiments to investigate when and how auditor actions can help deter manager opportunism. In Study 1A, we find that managers are less likely to use real earnings management (REM) when they expect auditors to both increase scrutiny and communicate their observations to the board. However, this effect occurs only when managers' operational decisions are inconsistent (versus consistent) with peer behavior. Study 1B findings suggest that increased auditor scrutiny alone (without auditor-board communication) is not likely to deter REM. In Study 2, we find that increased auditor scrutiny with communication to the board effectively deters both accruals-based earnings management (AEM) and REM, reducing the total level of manager opportunism. However, without communication, increased auditor scrutiny deters AEM, but also induces more REM. Our findings highlight the importance of auditor-board communication and demonstrate how auditor actions can contribute to the deterrence of manager opportunism. Data Availability: Contact the authors.