Does Readability Improve Investors' Understanding of Hedging Positions?

Readability is a key issue in the presentation of hedging risk information. We use psychological theories and experiments to analyse and examine the effects of the readability of hedging risk and hedge effectiveness information on investors' assessment of investments. We find that when hedging risk information presentation is more readable, investors' judgement of the attractiveness of an investment is higher when hedging effectiveness is high than when hedging effectiveness is low. However, when hedging risk presentation information is less readable, there is no significant difference in their judgement of the attractiveness of an investment between two hedging effectiveness levels. Meanwhile, we further identify the mediation effects of the readability of hedging risk information on investors' judgement of an investment's attractiveness. The findings of our study have significant implications for improving accounting information readability and enhancing accounting information quality. We use an experiment to examine the effects of the readability and hedge effectiveness on investors' investment assessment. We find more a readable presentation is helpful for investors to understand hedging activities. We further find information processing difficulty and management's competence mediate the effect of presentation readability on investors' investment assessment.